US CPI Surprises the Market and Supports the USD, but What is Next?

The latest market developments have been largely dictated by geopolitical tensions and trade policy shifts, creating a backdrop of heightened uncertainty for major currency pairs. The US dollar has shown resilience, gaining around 0.5% from recent lows, as concerns over trade war escalation momentarily eased following a partial policy reversal by the US administration. President Trump’s decision to halt the doubling of tariffs on Canadian steel and aluminium provided temporary relief; however, the broader 25% tariffs on these goods remain in place. With key tariff implementations still looming, including additional measures set for April 2nd, the risk of further escalation remains high.

DXY H1 Chart 

In response, the European Union has moved swiftly, imposing tariffs on $26 billion worth of US exports, with further measures scheduled for mid-April. These moves, coupled with increased tariffs covering 289 downstream products valued at $150 billion, signal a prolonged and intensified trade dispute. Notably, the automotive sector, particularly the supply chains for cars, trucks, and heavy machinery, stands to bear the brunt of these policies. Canada and Mexico remain among the most affected economies, with the broader uncertainty placing additional pressure on both currencies. Despite this, positioning in the Canadian dollar suggests that significant short interest among leveraged funds may be providing a temporary cushion against deeper depreciation.

Meanwhile, the euro’s performance remains closely tied to geopolitical factors, particularly developments in Ukraine. A potential ceasefire agreement, backed by US-led negotiations, could lead to a temporary de-escalation in the region. While the direct economic impact remains uncertain, a reduction in geopolitical risk could offer some support to the euro. Energy markets, however, remain relatively unmoved, with natural gas prices holding steady and crude oil showing only modest gains following revisions by the IEA, which lowered its forecast for excess crude supply.

EURUSD H1 Chart 2

In the UK, the focus has shifted to securing exemptions from US-imposed steel tariffs. The government is actively negotiating a carve-out, leveraging the argument that UK-US trade is largely balanced. However, success is far from guaranteed. While UK steel exports to the US have declined since the 2018 tariff measures, the sector remains a focal point for policymakers. Failure to secure an exemption could weigh on the British pound, particularly given current market expectations that some form of relief will be granted.

Looking ahead, the dollar’s trajectory will likely hinge on incoming economic data, particularly inflation metrics. The latest US CPI release came in lower than expected, with core inflation slowing to 3.2% year-over-year versus forecasts of 3.3%. This marks a continued downward trend in inflation, reinforcing the market’s expectations that the Federal Reserve could shift toward a more dovish stance. While the Fed has maintained a cautious approach, further evidence of easing price pressures could solidify bets on rate cuts later in the year. As a result, the USD has seen some softening, with investors recalibrating their expectations for future monetary policy adjustments. Meanwhile, the Bank of Canada is widely expected to implement a 25bp rate cut, reflecting growing concerns over economic momentum. With market sentiment heavily driven by shifting policy expectations and geopolitical risks, volatility is likely to remain elevated in the near term.

US CPI 

Overall, while the USD remains supported by relative economic resilience, the broader uncertainty tied to trade tensions and global policy shifts suggests that caution remains warranted. Market participants should remain vigilant as April’s tariff deadlines approach, with potential retaliatory actions set to further influence currency markets.

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