Complacency all around. What provides next spark?

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Where do we go from here?
Risk sentiment continues to show complacency here more than any decidedly risk-on edge, although crypto is having a go at the all-time highs early this week. A look at USDMXN and especially the carry-adjusted returns in MXNJPY show that some carry trades are having a field day, but within the major currencies, volatility is extremely muted after the Friday US jobs data failed to confirm multiple other weak data points on the US labor market last week, although the jobs report was hardly anything worth celebrating as we all know the payrolls change numbers will inevitably see revisions, as the -98k revisions to the prior two months of data reminded us. USDJPY refuses to veer away from 145.00, while EURJPY teased new highs for the year above 165.20 before dipping back lower, and EURCHF remains bottled up below 0.9400.

The market feels uninspired, and USD bears have been frustrated by the lack of fresh momentum. What will spark volatility in either direction here after the fizzle last week of the USD bearish case? Would it be USD bearish to get news that the Fed and US Treasury are finally moving to bring more liquidity to the US treasury market? (The Fed’s newly appointed head of Bank Supervision and Fed Vice Chair is worth watching on that front.) Or would that be USD bullish as it encourages flows into US treasuries? On the policy front, the wait for the final shape of the “big, beautiful bill” is set to be a long one.

Market participants seem to be losing conviction and technically, the loss of USD bearish momentum suggests rising squeeze risks (a USD rally). Headlines from US-China talks in London could provide some direction, although it feels like this market doesn’t want to react to negative news, or even trade news in general, figuring that we are moving in the direction of detente. Bloomberg’s John Authers asks the excellent question of whether the US May CPI on Wednesday will be the first data point that shows the hard data impact of Trump’s tariffs – perhaps the best bet for a volatility generating event if we get a strong surprise that crystallizes the impact of the tariffs.

The risk sentiment barometer of yore – SEK – is nothing of the sort nowadays, more attuned recently to the weak Swedish CPI figures and rate spread shift with the euro (the 2-year spread there has shifted about 20 basis points against SEK). But SEK bullish is the recent announcement of Sweden’s willingness to engage in deficit spending to fund military. The country has been running large surpluses in recent years and has a debt to GDP of an absurd 33.5%, about half of Germany’s 65%. 11.00 in EURSEK may continue to provide resistance.

Chart: EURSEK
The European fiscal expansion is still a thing, and Sweden’s economy is often seen as a benefactor of a strong EU economy, due to its strong industrial export base. EURSEK has backed up recently on the combination of weak inflation figures from Sweden pointing to higher odds of another Riksbank easing move, while the modestly hawkish ECB last week guided for at least an imminent pause of the cutting cycle after one more cut. That’s probably about as much drama as we can expect for relative rate moves for now. A shift in focus back to stimulus and a pickup in the EU industrial base would be EURSEK bearish, but governments move painfully slowly. For now, watching whether 11.00 continues to act as resistance in this pair.