Quiet Overnight Trade

MACRO FRAME

July’s inflation reports showed persistent underlying price pressures, reinforcing the case for a hawkish Fed stance, though the timing of any rate hike remains uncertain ahead of Wednesday’s meeting minutes.

STOCK INDEX FUTURES

Equity index futures were mixed in thin trading overnight, with the Nasdaq leading gains. Investors are largely looking through Middle East risk ahead of Fed minutes, retailer earnings, and next week’s Nvidia results. The VIX closed Friday at 14.25, its lowest level of 2026; it is sitting just under 15 in trading this morning. A VIX below 20 is associated with relatively low expected equity volatility, and current readings suggest markets see little immediate macro or geopolitical stress despite the backdrop in the Middle East. Q2 earnings are largely complete, summer liquidity is thin, and many investors are away, conditions that can either suppress market volatility or make it more vulnerable to sharp moves if a catalyst emerges. Historically, September is a volatile month for markets, and upcoming November mid-terms presents risks that volatility will steadily increase until elections are over. Oil prices are modestly higher; the US-Iran ceasefire is set to expire today, though markets are pricing a relatively low probability of renewed fighting. Still, the key risk remains in that markets are continuing to look past the disruption in the Strait and in the Red Sea. Given August’s light liquidity, renewed fighting is likely to significantly challenge the calm conditions.

Watch point: Equity volatility is being driven by increasingly concentrated bets in tech and semis, and that argues for a deliberate shift toward industrials and broader, real‑economy exposure amid the renewed fighting.

CURRENCIES

US DOLLAR: The USD index is lower at 99.47. Last week’s data materially lowered market expectations for a September rate hike, weakening near-term support for the dollar, which fell below the 100 level and repeatedly failed to reclaim it. Still, while July’s inflation data saw traders push back expectations of a September rate hike, the reports did reveal that underlying inflationary pressures remained, which could be confirmed in Wednesday’s Fed minutes. As such, and given the lack of forward guidance from the Fed, a September rate hike remains firmly on the table.

Watch point: US inflation data shows underlying price pressures remaining firm, which does justify hawkish policymakers’ views that Fed policy should move upwards.

EURO: The euro gained 0.22% higher to $1.1595, gaining on a weaker dollar in light trade. PMI data for August from France, Germany and the eurozone on Friday will be the highlight in a quiet week of data for the bloc. Recent rises in energy prices and the stalemate between the US and Iran would appear to present risks for a drop in the headline PMI figure. Traders  continue to expect a September hike from the European Central Bank. That has narrowed the implicit year-end policy spread between the Fed and ECB in favor of the EUR. Money markets are pricing an 84% chance of a hike. ECB and Fed policy expectations will continue to play an outsized role in EUR price direction and currently favors the upside for the EUR in the near-term. Traders are pricing around 39 bps of further ECB tightening this year.

Watch point: Broader price direction will be subject to Fed-ECB policy expectations, which is likely to be favorable to the EUR in the near-term.

BRITISH POUND: Sterling is 0.20% higher at $1.3556. Jobs figures on Tuesday and July inflation data Wednesday are likely to test the recent rally in the pound and heavily influence expectations surrounding potential policy tightening from the Bank of England raising in the remainder of the year. Wage growth figures will be keenly watched to gauge the extent of second round inflation effects from the Hormuz disruption. GDP data last week showed that the UK economy is proving more resilient against the energy price shock than initially expected, though performance in the latter half of the year is uncertain. Carry trade has also been supportive of the pound against the EUR, with short-term borrowing costs in the UK remaining among some of the highest in DM. Still, while headline GDP is stronger-than-expected, it does not materially remove the case for a cautious BoE. Markets are pricing in 28 bps of tightening by year-end and see 55 bps of tightening by June 2027.

JAPANESE YEN: The yen is little changed overnight at 159.24 yen per dollar. Q2 GDP figures missed expectations; Japan’s economy grew at an annualized 1.1% in April–June. The yen remains sensitive expectations over potential BoJ tightening and developments in the middle east, which will impact US yields and oil prices. The US–Japan intervention succeeded in curbing disorderly moves, but it has not changed the fundamental drivers of yen weakness, wide rate differentials, Japan’s imported-energy exposure and concerns over fiscal credibility. The burden now shifts to the BoJ: markets are pricing a 59% chance of a September hike after the July meeting revealed a more hawkish debate, but a failure to validate those expectations could renew pressure on the currency.

Watch point: With the recent intervention in the currency, the yen will need strong monetary policy support from the Bank of Japan to prevent further depreciation.

AUSTRALIAN DOLLAR: The Aussie is 0.52% higher at $0.7119. Wednesday will see fresh data on wage growth. a key figure given that inflation remains elevated. Thursday will hold employment data, where the unemployment rate is expected to rise modestly from its current 4.4%. Markets imply around a 47% chance of a hike in December, and see 14 bps of tightening by year-end. The dovish element from the meeting came from the bank’s reference to falling house prices and weaker housing credit, which could potentially raise the bar for further tightening. Q3 inflation figures will serve an outsized role in determining whether or not the bank raises rates this year after second-quarter inflation came in below forecasts.

Watch point: While a durable end to the war would alleviate downside risks to growth and moderate inflation pressures, ongoing pass-through into broader prices is likely to be in focus in upcoming data.

TREASURY FUTURES

Yields are little changed across the curve in thin trading overnight. Wednesday’s Fed minutes are likely to influence policy expectations, where views over underlying inflation trends will be closely watched. A Reuters poll surveying economists showed that Fed policy is expected to remain unchanged through year-end. However, against the US-Iran backdrop and oil prices about 25% above pre-war levels, markets are pricing in one hike by year-end. Last week’s data has added to expectations that the Fed has more breathing room to hold rates steady heading into September’s meeting. However, a weaker headline figure has masked some underlying pressures, while the backdrop of an unresolved Strait of Hormuz disruption leaves the risk that the energy could continue to feed into expectations. For Fed policy, without any forward guidance, the September decision will likely remain a close call. For yields, a tight range is expected to hold until Wednesday’s data, absent any major geopolitical developments.

Watch point: Mainly, the prospect that inflation will remain sticky reinforces a hawkish backdrop for the Fed over the medium-term, while Friday’s report has raised concerns that a slow labor market may be emerging.

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