DXY Under Pressure as CPI Miss Meets Tariff Mayhem

The market narrative has taken a sharp turn after the US CPI release came in softer than expected, adding fresh downside momentum to the USD. Despite sticky yield levels, the DXY is flirting with multi-month lows, and the broader market is beginning to recalibrate expectations around Fed policy, risk appetite, and geopolitical tension all converging at a sensitive time.

DXY H1 Chart 

In normal circumstances, the Fed may already be laying the groundwork for a rate cut. But the political noise coming from Washington is muddying the waters. President Trump’s late-night announcement of new letters to be sent to trading partners aimed at activating reciprocal tariffs by July 9th has injected more volatility and less clarity. Markets aren’t just trying to price in a softer Fed; they’re now also navigating the unpredictability of global trade policy.

The tariff news is hitting confidence. China has agreed to roll back some of its rare earth export controls, but only for six months, under strict licensing conditions. In Japan, PM Ishiba and opposition figures are clearly signalling that any deal with the US is far from imminent. Meanwhile, Europe is seen as the last domino to fall, if it falls at all. And while Treasury Secretary Bessent suggested top partners might get delays, the damage to sentiment is already underway.

USD/JPY has given background as traders seek shelter in the yen, but flows from Japan are mixed. EUR is outperforming across the board, helped by yesterday’s CPI print which lifted EUR/USD through the 1.15 handle. We now look toward 1.1650–1.17 as the next likely test. AUD, however, has disappointed. Despite better local inflation expectations and a soft USD, AUD/USD couldn’t hold its post-CPI gains suggesting some positioning constraints or lack of conviction. The 0.6550 level remains a must-break to shift momentum higher.

In the UK, fiscal risks continue to hang over sterling. The Spending Review outlined aggressive capital spending plans, but with little clarity on how it’ll be funded. April GDP contracted, exports slid (especially to non-EU countries), and the trade deficit widened. The market didn’t flinch much, but this kind of data quietly fuels downside risks for GBP. EUR/GBP is reflecting that, now pushing above 0.8460, with 0.8520/35 as the next stop.

Canada’s price action was a head-scratcher. USD/CAD remained nearly flat even as the broader dollar sold off. RM flows suggest there was supply, but conviction is lacking. I’d rather look elsewhere for cleaner opportunities.

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