The European session remained calm as markets consolidated, awaiting updates on trade negotiations. There was little news and the high volatility of recent weeks has stabilised.
Attention is now on trade deals and US-China relations, resulting in mostly stable price movements. In the UK, the employment report showed a steady unemployment rate, with no change to interest rate expectations.
German Economic Data
German data showed a decline in the ZEW index to its lowest since July 2023. Markets showed little reaction to this economic data as the focus remains on tariffs and trade discussions.
In the US session, the Canadian CPI report was released ahead of the Bank of Canada’s rate decision. Inflation has risen following the Bank’s easing measures, with tariffs expected to keep it elevated and affect growth. There is a 61% chance that the central bank will maintain current rates, with the market anticipating 44 basis points of easing by the end of the year.
What we see so far is a moment of stillness after a period filled with large swings and intense speculation. The freeze in direction reflects how traders are becoming more hesitant as they wait for fresh economic data or headlines that could set off the next move. With trade matters driving market tone, especially tensions between major powers, price action has calmed, providing a pause for markets to reassess.
The employment figures from the UK did not surprise, suggesting no major pressure to adjust policy in the near term. With unemployment flat and no shift in expectation for interest rates, the message from the labour market is stability. That keeps the central bank under little pressure to respond in a hurry.
Meanwhile, in Germany, the decline in the ZEW index hints at sliding sentiment among investors. Augustin’s team pointed to the lowest reading since mid-last year, which could hint that confidence in the Euro area economy is weakening. However, with little market movement in response, it’s clear that investors are simply not allowing this to influence their positioning in the short term. That is likely because global trade headlines are keeping them more focused externally.
North American Economic Indicators
On the North American front, the Canadian Consumer Price Index showed inflation pushing higher. That’s a clear rebound following multiple soft prints earlier this year. After a round of monetary easing, the rise in prices was somewhat expected, especially with added pressure from trade tariffs, which are starting to make their way into consumer goods. While inflation is rising, markets currently assign 61% odds that interest rates will hold steady at the next meeting. Monetary markets still imply a reduction of nearly half a percentage point by year-end, suggesting that the rise in inflation is seen as temporary by policymakers.
In recent sessions, with volatility falling, there’s been a shift towards fewer position changes and a more cautious stance. Price action is waiting, not reacting.
For derivatives traders, that changes the game. When we see reduced implied volatility and few catalysts on the near-term horizon, short-term strategies need to adapt to smaller ranges. Directional trades are harder to justify. Option writing through strangles and straddles is drawing some interest but carries risk if any unexpected data upends calm expectations. Gamma exposure needs constant monitoring, especially once policymakers begin speaking this week.
With futures pricing in over 40 basis points of easing in Canada despite rising inflation, any surprise in tone or data could shift the curve rapidly. We are keeping a close eye on swaps and front-end positioning as they are likely to move first. As it stands, momentum strategies need to be light. The slower movement of underlying assets is limiting payoff potential for those relying on breakouts.
In early week trading, spreads remained tight across major interest rate products, and convexity hedging remains controlled. Watch for inversion or dislocation around key expiration. If markets start to price in more aggressive moves, volatility will return. Until then, it’s a matter of patience and managing exposure closely.
Long gamma remains unattractive without nearer catalysts, making high delta plays difficult to defend over multiple sessions. Where we do see opportunity is in adjusting hedges around inflation-sensitive products, such as short-term curves and commodity-tied FX. Any pickup in commodity prices will feed back into central bank expectations, especially where inflation is already proving sticky.
We’ve been tracking basis movements closely — and there’s still limited reaction despite wider macro themes. That’s a tell. There remains a desire to fade upside risk, not chase downside surprises. At least for now.
