Insights 
VT 
Germany, France, and Switzerland will have bank holidays for Whit Monday. Despite this, both the Xetra and Euronext exchanges will remain open, allowing trading to continue as planned in the second week of June.
The dollar is experiencing a slight decrease in strength, with risk sentiment appearing more cautious. Presently, attention is on the US-China trade talks happening in London. This event is regarded as the primary risk event for the beginning of the week.
Impact On European Markets
While trading venues across Europe remain operational, Monday’s shortened staffing and thinner volumes may still inject an artificial calm into early price action. With some regions observing Whit Monday, quieter desks could mean moves are more mechanical than thoughtfully driven by fundamentals. That creates room for mispricing, particularly in instruments sensitive to short-term liquidity. We often find that in such environments, price discovery gets disproportionately influenced by institutional flows rather than fresh news inflows.
Meanwhile, tailwinds for the greenback have moderated. The dollar’s recent pullback seems linked to softer positioning and a relative rollback in inflation expectations. Treasury yields have dipped, albeit modestly, nudging currency traders to pare risk, especially in leveraged carry strategies. Options markets are showing a mild uptick in implied volatility for major forex pairs, suggesting that uncertainty around central bank positioning is far from resolved.
In terms of broader macro focus, the bilateral meetings between trade advisers from the US and China are drawing closer scrutiny. With London as the chosen host this time, expectations lean towards incremental progress, rather than sweeping developments. Any mention of sectoral subsidies, intellectual property, or export controls will be dissected shortly after.
Powell and his colleagues have stayed firm in their recent messaging. Rate cuts remain off the table for now, even as slowing manufacturing prints and wobbling consumer sentiment draw questions from bond markets. For us, the short end of the curve has been especially jittery, reacting first to dovish statements, but then quickly swinging back when hard data fails to provide support. That said, inversion risks have softened slightly, at least until June prints give more direction.
Outlook For Interest Rate Derivatives
We noticed that shorter-dated vol has edged up particularly in US interest rate derivatives—perhaps not surprising, given how sensitive that space remains to fast-moving policy narratives. With trade talks in motion, any remarks with a tone of structural disagreement may well push rate expectations again. We expect two-year futures to bear the brunt of such shifts with a higher beta response.
Looking across the Channel, flash PMI data from the eurozone due midweek could challenge the stability we’ve seen in bund futures. Economists are anticipating a slight pullback in services but modest resilience in construction sector surveys. Forward rate agreements are already pricing in a less aggressive hiking path for the ECB, and any deviations in the data will either reinforce or unravel this pricing. Traders holding gamma in EUR-related swaps may want to reassess their expiration profiles as these prints draw closer.
For us, the coming sessions are less about trend-following and more about reading the nuance in scheduled releases and unscheduled headlines. Machines and algorithms may provide the first wave of reaction, but it’s still the discretionary flows that determine where things settle during London hours. We’re particularly wary of automated triggers around technical levels in dollar-yen and ten-year Treasury futures, which tend to amplify otherwise contained moves.
More broadly, short-term spreads between European and US yield curves speak to diverging growth narratives. If the German 10-year bund continues to hover below 2.5%, while its US counterpart presses against 4.5%, the transatlantic rate differential will likely perpetuate underlying dollar demand, regardless of the mood music from geopolitics. But that’s assuming the upcoming NFP release doesn’t throw a wrench in things.
Positioning data continues to point towards overweight long dollar exposure, which, if unwound amid a trade breakthrough and dovish tilt from the Fed, could result in a sharp reversal. However, until these catalysts land definitively, many institutions appear to be staying tactically long on greenback strength, hedging through options with downside tails. That’s a clear tell.
Exchange-traded derivatives volumes in interest rates have picked up into the event risk window, especially in the three-month eurodollar contracts. Price action there is hinting at either a hawkish surprise or a breakdown in negotiation rhetoric. In our view, the premium on near-dated puts versus calls tells us more about downside protection than directional conviction.
As liquidity normalises later in the week, particularly post-Wednesday, we expect more honest pricing to take hold. Until then, traders ought to account for potential whipsawing in low-volatility regimes fed by low participation and macro conjecture.
