The greenback is edging higher against most of its advanced-economy counterparts, but traders remain cautious as they await tomorrow’s inflation release, Thursday’s long-dated Treasury auction, and any substantive breakthroughs in US-China trade negotiations. North American equity futures are little changed, yields are inching lower, and all major currency pairs – other than those involving the British pound – are stuck within incredibly-tight trading ranges as the data calendar slows and the Federal Reserve’s blackout period remains in effect, leaving markets to trade on shifts in broader sentiment.

The pound is the lone exception to the sense of calm* after selling off in response to the sharpest drop in employment in five years and an unexpected slowdown in wage growth. Data released this morning by the Office for National Statistics revealed a drop of 109,000 payrolled employees in May, marking the largest monthly decrease since the pandemic. Private sector wage growth – a critical inflation determinant in the UK’s services-led economy – slowed to 5.1 percent year-over-year, down from 5.9 percent two months prior.

Upward revisions are likely to temper the initial shock, but the report has undoubtedly strengthened the case for further interest rate cuts. Traders now have a Bank of England move fully priced in for September, ahead of the November date that had been anticipated ahead of the release. If Thursday’s gross domestic product data – which is forecast to show a 0.1-percent contraction in April after a robust 0.7-percent expansion in the first quarter – confirms expectations for a stall in the economy, the consensus could shift even farther, with August coming into view as the next possible date for a cut.

Tomorrow’s US consumer inflation report could prove pivotal in shaping expectations around the likelihood of a September rate cut. We – along with the consensus – are inclined to expect a relatively-tame rise in underlying price pressures, but with markets currently priced for roughly 50 basis-points in easing from the Fed by year-end, an upside surprise in core inflation – a month-over-month print above 0.35-percent or so – could see the dollar climb and risk assets sell off. Stagflation fears have eased over the last month, but remain elevated, and could come roaring back if price growth begins to accelerate.

Thursday’s auction of $22 billion in thirty-year Treasuries is attracting a lot of attention, given that the “de-dollarisation” narrative has dominated investor conferences, social media discussions, and the financial press over the last two months. With growth differentials narrowing, a number of factors sapping global liquidity, deficits continuing to expand, and worries emerging around the long-term stability of the US political system, the threat of a “buyers strike” – in which investors refuse to absorb more long-term issuance at offered prices – seems plausible, and the possibility of a negative market reaction to an auction tail or drop in the bid-to-cover ratio is something currency traders have to keep an eye on. But we’re not seeing real warning signs in the data: although Treasury term premia have risen, they are simply back to levels last seen in 2014, and market functioning – as defined using Bloomberg’s wonderful government securities liquidity indices – remains relatively unconstrained, especially relative to the UK and Japan. To us, the likelihood of a bond market tantrum that weakens the dollar remains low**.

Negotiations with China also seem unlikely to deliver the catalyst for an extreme move in currency markets. Investors expect positive headlines as Washington and Beijing seek to lower tensions – and President Trump may seek to take a victory lap on any signs of concession – but the reality is that China’s economic issues are largely home-grown. The country’s bilateral surplus with the US has shrunk in recent months, but exports continue to grow as trade flows shift into emerging markets that sell into the US, and the economy is still moving up the value chain from a competitiveness perspective. The political calculus suggests that any trade “deal” will be composed of adjustments around the edges, as opposed to a fundamental reworking of the bilateral relationship.

Risks in the next few weeks seem more likely to be of the “black swan” variety – originating in something unforeseen and impossible to predict – as opposed to coming from the more prosaic issues facing markets this morning.

*The UK’s contribution to the global culinary landscape may be less than impressive, but thank you for giving us something to write about this morning.

**With all the usual caveats for famous last words.