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In a dramatic pivot that has jolted currency markets, the United States and China have agreed to a sweeping rollback of mutual tariffs, marking what may be the most significant thaw in trade tensions since the Trump 1.0 era. For traders and economists alike, the deal announced in Geneva went far beyond expectations. Where many had braced for a moderate reduction to 60%, in line with earlier campaign signals, the reset to a 10% baseline stunned the market.
The dollar, which had been on the back foot since March as tariffs escalated, has clawed back around 3.5% on a DXY basis. Yet the bigger picture is less about relief and more about recalibration. The tariffs previously raised on Chinese goods had triggered a reciprocal retaliation and sent the dollar tumbling by roughly 9% from March to April. This rollback combined with the Fed’s current stance has pushed expectations of a July rate cut off the table. A week ago, the market was pricing in a 25bp cut with confidence. Now? Barely a 10bp move is anticipated.
DXY H4 Chart
Chair Powell’s previous hesitation to adjust policy amid trade uncertainty suddenly feels outdated. The Fed might now find itself forced to defend its current rate path longer than the market had hoped. The 90-day window before the next review of tariffs expires in August, just after the July FOMC, could still reopen volatility. But for now, US economic sentiment is buoyed. Boeing just got the green light to resume deliveries to Chinese airlines, and equity markets especially the tech-heavy Nasdaq are roaring in response.
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Still, deeper questions remain. Trump has framed this as a “complete opening” of the Chinese economy, claiming it will narrow the US trade deficit and rebalance global trade. History, however, suggests caution. Both China and Germany have faced similar Western demands for decades with limited structural change. The risk is that Trump is overestimating what he has secured, and that tariffs could return with a vengeance, particularly with US elections drawing closer.
GBP Caught Between Resilience and Doubt
The British pound was among the top G10 performers this week a notable feat, considering it was up against a surging dollar. A fresh bilateral trade agreement with the US has helped reinforce the pound’s credibility in an increasingly fragile global trade framework.
GBPUSD H1 Chart
More quietly but just as significantly, the Bank of England’s internal debate is growing more intense. Last week’s policy meeting nearly saw a rate cut, with Deputy Governor Clare Lombardelli and MPC member Megan Greene both leaning toward easing. Now, with the US-China détente in full view, their decisions appear finely balanced in retrospect. Greene has a known hawkish tilt, but Lombardelli’s position signals the Bank may be edging toward a more cautious outlook not rushing to cut further without clear signs of economic deterioration.
Today’s UK labour market data only sharpened that narrative. While headline wage growth slightly outpaced expectations, the PAYE job data continues to show weakness. April saw a 33,000 drop in payroll employment the fifth fall in six months underscoring a softening trend. Wage data excluding bonuses softened too, supporting the idea that the UK labour market is cooling, albeit unevenly. In short, while the BoE may move to ease further, it will likely do so with a measured hand. Inflationary pressures remain sticky, and wage growth is still too hot for comfort when viewed through the lens of a 2% inflation target.
Looking Ahead: US CPI in Focus
Just days after Washington and Beijing agreed to roll back nearly all trade war-era tariffs, U.S. inflation data added another twist to the macroeconomic landscape. April’s CPI print came in softer than feared, with headline inflation ticking up just 0.2% on a seasonally adjusted basis, following a dip of 0.1% in March. On an annual basis, inflation eased to 2.3% the lowest 12-month increase since early 2021. Markets initially priced this as a dovish signal, but with trade risks receding rapidly, the dollar is instead gaining altitude, buoyed by repricing in rates and risk sentiment.
Shelter costs were again the dominant driver of inflation, rising 0.3% month-on-month and contributing more than half of April’s increase. Energy prices also rebounded modestly, up 0.7% on the month, with electricity and natural gas making notable gains, even as gasoline prices eased. Food inflation offered mixed signals: the index for food at home declined by 0.4%, while dining out continued to show sticky inflation, up 0.4%. Egg prices plunged nearly 13%, reflecting continued volatility in animal product pricing.
Core inflation (CPI excluding food and energy) also rose 0.2% in April not exactly alarming, but just enough to cast doubt on the likelihood of a near-term Fed pivot. Before the CPI release, a July cut was already looking less certain in the wake of the tariff détente. Now it’s almost off the table.
CPI for all Items
The dollar is enjoying a short-term boost from the easing of trade tensions, but structural risks remain embedded in the global economy. The UK finds itself in a peculiar, sweet spot: benefiting from global shifts while facing mounting domestic challenges. Central banks on both sides of the Atlantic are not yet ready to pivot decisively, but they’re inching toward divergence. Expect volatility to return by August as the 90-day tariff review window closes and with US elections heating up, politics may once again overpower policy.
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