US Dollar: Trade Agreement Fails to Lift Greenback as CPI Takes Focus – ForexNews.PRO
The recent Sino-American trade discussions in London have outlined strategies to restore trade in critical materials, yet they didn’t achieve a significant breakthrough, leaving the US dollar susceptible to internal fiscal issues. Today, the US core CPI (projected at 0.2% MoM) and a closely monitored 10-year Treasury note auction pose potential risks for the dollar.
USD: Attention on Inflation Data and 10-Year Auction Today The dollar’s direction this week has been unclear. The ambiguity surrounding the extent of the US-China trade talks in London has allowed domestic elements to influence the relative performance of G10 currencies. Recent reports suggest that negotiators have reached a preliminary agreement to resume the exchange of sensitive goods, including rare earth minerals, subject to approval from Trump and Xi.
From a market perspective, this seems like a favorable move towards reducing tensions, but not a substantial advancement. China’s reluctance to commit to lowering its trade deficit still gives trade proponents in Washington reason to oppose any fundamental easing.
Markets are viewing the London summit with reservations. The dollar remains a key indicator of trade sentiment. While it has performed reasonably well earlier this week, it hasn’t extended the gains from last week following the US-China meeting announcement. Our short-term model indicates it’s still approximately 3-4% undervalued compared to major G10 counterparts.
US equity futures suggest a mild opening this morning, following slight gains yesterday.
The dollar’s value has been affected by internal financial events. A weaker-than-expected sale of 3-year Treasury notes erased some recent increases in US government bond values. These bonds now face a double challenge today: the closely watched 10-year note sale and the release of CPI figures.
We anticipate that core inflation for May will be around 0.2%, lower than the 0.3% expected by most analysts. This could reduce pressure on Treasuries, but it might also weaken the dollar as the likelihood of a rate cut in September (currently with a 50% probability) decreases. Later today, the May data on the Federal budget balance will also be published.
Our outlook for the dollar today is negative. This is partly due to our core CPI forecast, but also because of reports suggesting that Treasury Secretary Scott Bessent is being considered to replace Powell as head of the Fed. The dollar tends to react poorly to anything that threatens the Fed’s independence. Given that Bessent is likely to favor much lower interest rates (similar to Trump’s statements), the dollar faces significant downside risks from this news.
EUR: ECB Maintaining a Hawkish Stance This week’s market movements are primarily influenced by events in the US. The only news from the euro area comes from scheduled speeches by ECB officials, which have so far reinforced the less dovish tone established by President Christine Lagarde last week.
The head of Croatia’s central bank, Boris Vucic, confirmed the emerging consensus within the ECB yesterday, stating that the bank is in a “very good position” and should wait for “another projection” – referring to the September forecast – before taking its next action. Markets are pricing in a 15 basis point rate hike for September, 17bp for October, and 30bp for December.
From a currency perspective, the impact is not substantial. The EUR/USD exchange rate rose sharply last week due to the ECB’s shift toward a more hawkish stance, but short-term interest rate differences are not the main drivers of G10 currency movements, which are focused on central bank events. As mentioned earlier, the EUR/USD direction today will be largely determined by the dollar, with likely support around 1.1400 and a potential move above 1.1500 by the end of the week.
