Forex overview. US Dollar Rises Amid Sticky CPI Expectations and Easing Trade Tensions – ForexNews.PRO
After a day of volatility fueled by trade news, currency markets are showing signs of stabilization. The temporary truce in the US-China trade dispute has helped the US dollar recover some of its recent losses, although significant further gains are not anticipated. The key event for today is another US core inflation reading, expected to remain steady at 0.3% month-on-month, which should continue to support US interest rates and the dollar.
Following Monday’s active trading, the FX market is calming down. The Japanese yen and Swiss franc experienced the most significant declines as Washington’s policy was reassessed in light of the temporary trade agreement. This 90-day pause is viewed as a pragmatic approach rather than a reflection of ideological objections to imports, especially from China.
The release of US CPI data for April today will shed light on the impact of April’s tariffs on the US economy. It remains to be seen how much of the increased tariffs on Chinese goods were passed on to US consumers, or whether US importers absorbed the costs or halted imports altogether.
Experts suggest that the impact of these tariffs may not be fully reflected in US inflation data until June. However, today’s expected core CPI data of 0.3% month-on-month is expected to reinforce the view that the Federal Reserve is in no hurry to lower interest rates. Market expectations for the terminal rate in the Fed’s easing cycle have already been adjusted upward to 3.50% from 3.00% this month.
The market has also pushed back expectations for the first Fed rate cut to September. Today’s US small business NFIB optimism index is also expected to show a decline in confidence, although this may not significantly impact the market given the recent US-China developments.
The perception that Washington is stepping back from potentially damaging policies has boosted equity markets, and the US 10-year swap spread has narrowed slightly. For now, compelling arguments for shifting assets away from the US and the dollar may be put on hold, at least until the real economic impact of recent uncertainties becomes clearer.
The DXY index broke through resistance at 100.80 yesterday and may continue towards 102.60. However, this is seen as a correction within a bear market rather than the beginning of a substantial dollar rally. It is expected that both public and private sectors will seek to reduce their US allocations and increase dollar hedge ratios if the dollar experiences a 2-3% rally from current levels.
EUR/USD experienced an overvaluation, serving as a reminder that limits do exist. It appears that EUR/USD has completed the initial stage of a potential long-term bullish trend. The current corrective dip is expected to find support in the 1.1030/50 area, and this week’s decline reinforces the year-end target of 1.13.
Potential challenges to the dollar later this week include US retail sales data for April and TIC data for March, which will reveal foreign investment trends. EUR/USD will also be monitoring the planned meeting of leaders from the US, Russia, and Ukraine. Today, the European calendar includes German ZEW expectations, with a slight EUR/USD bias towards 1.1030/50.
