Tariff Tensions, CPI Jitters, and a Wobbly Dollar.
Dollar bruised by tariffs and volatility: The USD is under pressure despite equity strength, as policy flip-flops increase risk premiums and traders brace for CPI data.
Commodity currencies rally: AUD, NZD, and Latam FX led gains as markets reassessed trade risks and found comfort in the tariff pause.
EUR/USD stuck in limbo: The euro remains range-bound but could gain traction if US assets lose favour or the ECB successfully promotes the euro as a dollar alternative.
Gilt market shakes sterling: UK bond weakness is a growing concern for GBP, with high issuance and economic fragility exposing vulnerabilities.
Tariff retaliation and CPI risks loom: Markets are on edge about potential Chinese retaliation and a sticky US inflation print, which could drive further FX and bond market volatility.
USD: Wounded but Still Walking
Markets breathed a cautious sigh of relief following a pause in the harshest US tariffs, sparking hopes that trade disputes might be more tactical than structural. This optimism helped lift global risk sentiment, with commodity-linked currencies—particularly those tied to Asia like AUD and NZD—seeing strong gains. In contrast, traditional safe-havens like the yen and Swiss franc underperformed. Emerging market currencies, especially in Latin America, also rebounded after prior pressure from slumping commodity prices.
Despite a strong rebound in the S&P 500—up 9% on tech and retail strength—the dollar’s DXY index remains subdued, just 1% above recent lows. A notable laggard is USD/JPY, which hasn’t responded as expected to elevated US Treasury yields. This could reflect mounting uncertainty in US policy, demanding a risk premium across American assets. Watch the US 5-year CDS spread—it’s quietly ticking back up to late-2023 levels.
In the background, attention is turning to whether the US-Japan Mar-a-Lago-era idea of coordinated currency weakening is being revisited. With the BoJ in hiking mode, Japan may be the only candidate for such an arrangement.
For now, markets await today’s CPI print. A sticky 0.3% core reading could theoretically lift the dollar via higher yields—but recently, stronger inflation prints have been seen as negative for the dollar due to concerns about real consumer strain.
Also on the radar: potential Chinese retaliation to Washington’s latest tariff hike. Any new countermeasures could send USD/CNH toward 7.42, reigniting FX volatility. Overall, DXY is likely to remain volatile in a 102.00–103.50 range, possibly drifting lower if tariffs start denting US hard data.
EUR: Still Spinning in the Cycle
EUR/USD continues to live up to its “washing machine” nickname, churning in place as trade flows and capital positioning offset each other. So far, the euro has remained relatively untouched by trade drama—though if a “sell America” narrative gains traction, European markets may become safe-haven alternatives.
The ECB seems eager to position the euro as a robust alternative to the dollar, but progress has been mild. A slight Fed repricing—from four expected cuts to three—has added modest downward pressure on EUR/USD.
Expect a continued range between 1.09 and 1.11 in the near term. Should the pair hold support at 1.0900 even with firm US inflation data, it would signal lingering bearish sentiment toward the dollar.
Elsewhere, Norway’s krone is bouncing back following sticky March inflation (core at 3.4%), possibly delaying rate cuts. Meanwhile, EUR/CHF dipped below 0.93 again. The SNB may be cautious about intervening, as excessive FX activity risks retaliation from the US in the form of even higher tariffs.
GBP: Gilt Complexities Cloud Sterling
EUR/GBP briefly touched 0.8650, coinciding with a sell-off in UK gilts. That UK bonds underperformed even US Treasuries is worrying for the UK Debt Management Office, which is already grappling with £300bn in new issuance this year. Slower UK growth would further strain public finances and pressure the gilt market—a weak spot for sterling.
The market now expects three BoE cuts this year, a view we share. Still, we’re cautious about calling EUR/GBP below 0.8500 just yet, especially if today’s US CPI comes in hot and rattles global bond markets.
Some relief came from solid demand at US Treasury auctions—especially the 10-year. If that trend continues with today’s 30-year sale, and if EUR/USD holds, GBP/USD may find support near 1.2800.