The US dollar is trading with a softer tone this morning, slipping against all of its major counterparts as it relinquishes gains made on the heels of Friday’s robust jobs report. Ten-year Treasury yields are retreating from the 4.5-percent mark before a heavy slate of bond auctions, equity futures are holding steady ahead of the North American open, and implied volatility in currency markets is subsiding toward historical averages as the pace of top-tier data releases slows and investor risk appetite shows tentative signs of improvement.

Friday’s nonfarm payrolls report reduced pressure on the Federal Reserve to cut interest rates. Signs of cooling demand in the labour market were evident – job creation in the previous months was revised down by 95,000 positions and layoffs kept creeping higher – but the American economy added another 139,000 jobs and the jobless rate held steady near levels consistent with theoretical estimates of “full employment”. Traders now expect just one additional rate cut by year end – and real yield differentials are back to playing a somewhat dollar-supportive role – as policymakers watch economic conditions evolve and await clarity on the government’s budget and trade policies.

Markets don’t expect tariff-driven price increases to show up in a significant way in this week’s US inflation updates. Wednesday’s May consumer price report and Thursday’s producer price release are both expected to feature a slight firming in tangible goods costs as onshore suppliers begin to pass tariff increases along to customers, but this should be offset by declining input costs from China – an update yesterday showed factory-gate prices falling 3.3 percent in May from a year earlier, marking the steepest contraction in 22 months – and by softness in discretionary spending categories on the services side of the equation. June and July numbers should provide a more decisive read on how tariff increases are flowing through into end-user consumer prices.

Traders think ongoing negotiations between the US and China will generate positive news on the margins. US Treasury Secretary Scott Bessent, Commerce Secretary Howard Lutnick and Trade Representative Jamieson Greer are set to meet with a Chinese delegation led by Vice Premier He Lifeng today in London, and early signs suggest that both sides are prepared to compromise, with domestic political and economic considerations pointing toward a relaxation in tariffs, export controls, and social media rhetoric. This may be priced in however – given that investors have been trading on the basis of the TACO rubric for weeks – and markets are unlikely to react with ebullience unless a true breakthrough is achieved.

The British pound’s year-to-date gains could shrink modestly if tomorrow’s labour market data and Thursday’s monthly gross domestic product numbers confirm expectations for a slowdown. Real yield differentials have favoured the pound against the euro and dollar for much of the last year and a half, but that edge could be dulled in the coming months if wage pressures continue to moderate and growth projections are revised lower. In contrast with most other countries, the United Kingdom looks unlikely to materially raise inflation-boosting tariffs on tangible goods this year, and its services-driven economy remains vulnerable to weakness as the global economic cycle turns more negative. The Bank of England is generally expected to stay on hold in June, but several rate cuts could land in the latter half of the year as inflation risks fade and growth remains moribund. We think the pound will struggle to hold any gains past the 1.35 threshold against the dollar this year.

Bond auctions could shake markets out of this sense of relative calm. Long-dated bond yields have been rising for months, with growing inflation worries, fiscal deficit fears, concerns about weakening demand from foreign real-money investors, and political uncertainty combining to widen risk premia across the curve. US credit default swaps – which are used to insure against a sovereign default – have fallen from their early-April peaks, but are higher than their counterparts in most other advanced economies. With the Treasury set to auction $58 billion of three-year notes tomorrow, $39 billion in 10-year debt on Wednesday, and $22 billion in 30-year issuance on Thursday, any sign of diminished investor appetite could be interpreted as a reason to reallocate assets away from the US – while healthy demand might see the dollar gain* as fears of a buyer’s strike abate and the “de-dollarisation” theme loses some of its impetus.

*I’m inclined toward the latter scenario, but I may be biased after watching the dollar read its own obituary dozens of times over the years.