Dollar rebounds as US and China agree to hold trade talks
Fed enters the spotlight; focus to fall on tariff commentary
Euro gains after Merz elected as German Chancellor
Wall Street rebounds, gold pulls back on improving risk sentiment
US-China trade talks to kick off
The US dollar slipped against all its major counterparts on Tuesday, on worries that the clock is ticking and the US is not securing trade deals with its trading allies. The market may have started thinking that the 90-day delay on reciprocal tariffs is being eaten out without any meaningful progress in negotiations.
Having said that, concerns have eased overnight, and the dollar rebounded, gaining the most against the safe havens yen and franc. This was due to news that the US and China are scheduled to hold their first official round of trade talks during the coming weekend. Specifically, US Treasury Secretary Scott Bessent and Chief Trade negotiator Jamieson Greer will meet with Chinese economic official He Lifeng in Switzerland.
Although Beijing had repeatedly said that they will not engage in negotiations unless tariffs were withdrawn, the stakes for the Chinese economy seem to be high, with its vast factory sector already feeling the burden of the tariffs. That may be why the world’s second largest economy has changed strategy.
However, the statement confirming that China had agreed to meet with the US representatives also warned that if the US says one thing and does another, China will never agree. This means that the road towards a deal will not be strewn with rose petals, and that the over-100% tariffs will stay for some time.
Will the Fed maintain a wait-and-see stance?
Worried about how tariffs will impact monetary policy, traders will lock their gaze on the FOMC decision later today. Expectations are for the Committee to remain sidelined for another meeting, and thus, given that neither updated economic projections will be published nor a new dot plot, all the attention will fall on the accompanying statement and Fed Chair Powell’s press conference.
Concerns about tariffs driving the US economy into recession have prompted investors to pencil in more basis points worth of rates cuts by the end of the year compared to the March dot plot. Specifically, Fed funds futures are pointing to around 80bps worth of reductions, while the latest dot plot suggested 50.
That said, even after Trump’s sweeping tariff announcements, many Fed officials, including Chair Powell, reiterated the view that there is no urgency for a change in policy, as they seek more information to determine how tariffs are affecting the economy. And this despite snowballing pressure by Trump to lower borrowing costs. There are even some policymakers who are more concerned about the upside risks tariffs pose to inflation and fairly so. After all, the latest set of PMIs revealed that price pressures intensified in April, while the 1-year inflation expectations of the University of Michigan have skyrocketed to 6.5% y/y.
Combined with Friday’s better than expected employment report, this suggests that although the Fed could sound somewhat more concerned about economic growth, officials are unlikely to satisfy current market bets. Thus, a less-dovish-than-expected outcome will solidify the notion that the Fed continues to conduct monetary policy outside the influence of the US President and could help the dollar recover some more of its recently lost ground.
Euro gains, stock futures rebound, gold pulls back
Elsewhere, the euro gained yesterday after Friedrich Merz eventually secured the votes needed to become Germany’s Chancellor, after facing an unprecedented defeat on the first round, while the Indian Rupee slipped after India launched strikes on Pakistan after a deadly attack on tourists in Indian Kashmir.
Wall Street extended its slide yesterday, but futures are pointing to a higher open today, perhaps on increasing risk appetite following headlines that the US and China will sit at the negotiating table. This may have also been the driver behind gold’s pullback today.