The US Dollar Index (DXY) attempts to sustain its recovery towards 103.00, facing renewed selling pressure as equities and yields decline. This shift follows comments from President Trump about maintaining tariffs, amidst warnings regarding confidence from business leaders.
Attention is focused on the upcoming US Consumer Price Index (CPI) data, which may reflect impacts from the current administration. The CPI release on Thursday is expected to provide insights into inflation trends, with the White House claiming price reductions on various commodities.
Market Downturns
Markets experienced notable downturns, with the Chinese Hang Seng dropping by 13% and European indexes seeing over 6% declines. US futures showed a smaller correction, decreasing by around 3%.
There is a 46.2% chance of an interest rate cut by the Federal Reserve in May, up from 33.3% earlier, with a 53.5% probability of rates falling to the 3.75%-4.00% range by June. The US 10-year yield is around 4.10%, recovering from a five-month low of 3.85%.
In the DXY index, a technical rejection occurred early in the week, with resistance noted at the pivotal level of 103.18. The next significant supports are 104.00 and the 200-day Simple Moving Average (SMA) at 104.87.
Tariffs are import duties intended to enhance competitiveness for local producers. They differ from taxes in that they are paid by importers upon entry, rather than by consumers at purchase.
Trump’s tariff strategy aims to bolster American industries, focusing on major trade partners, including Mexico, China, and Canada. In 2024, these countries accounted for 42% of US imports, with Mexico being the largest exporter.
Economists Perspective
While some economists advocate for tariffs as protective measures, others warn they may escalate trade tensions and elevate prices over time.
What we see playing out here is a mix of shifting sentiment across asset classes, anchoring the US Dollar Index (DXY) at the heart of the conversation. The index has tried to claw its way up toward the 103.00 mark, but renewed downward pressure has emerged in tandem with falling equities and softening Treasury yields. This kind of alignment often reinforces dollar weakness, as risk appetite wanes and economic confidence gets shaken. The market has keyed into past remarks from the former president, who suggested a continuation of tariff measures—adding yet another variable that has unsettled both business expectations and asset valuations.
All attention now turns to this Thursday’s inflation print—specifically, the US Consumer Price Index. Inflation data has taken on a more direct political overtone, with assertions from the administration pointing to commodity price relief. Still, what we expect and what actually comes through in headline and core readings may diverge, and pricing dynamics for certain traded goods are only part of the broader inflation picture. The equity markets have clearly pivoted in expectations, as seen in recent drawdowns—especially in Hong Kong and continental Europe, where losses extended beyond routine corrections.
Derivatives markets, particularly those pricing in monetary policy paths, have quickly taken notice. Interest rate futures now reflect a steeper probability of easing from the Federal Reserve. The odds of a cut by May have ratcheted up nearly 13 percentage points in a matter of days. For positioning, this implies a more dovish rate environment being priced in sooner than many had planned for at the start of the quarter. As such, traders in rate-sensitive products might scale into hedges or reprice options vol accordingly.
The 10-year yield, though stabilising closer to 4.10%, remains well off its recent highs. We view this not just as a technical bounce but also as a repricing of the uncertainty around the Fed’s trajectory. An earlier low near 3.85% may signal a firm cap on yields for now, unless upcoming macro surprises lift inflation expectations again. There’s plenty of room for rate volatility, especially with rate path assumptions shifting this rapidly.
Looking at technicals, the rejection of the DXY at around 103.18 may not seem dramatic at first, but it’s a key pivot level based on recent closing averages. If weakness deepens, 104.00 becomes a magnet for buyers again—just below sits the 200-day SMA, a metric that routinely brings in systematic flows. But given current volatility and the jumpiness of reaction to micro- and macro-news, wide intraday swings should not be ruled out. Moves in volatility indices have started to mirror this nervousness.
What’s also making the rounds are longer-term policy implications. The tariff policy reiterated by Trump highlights a protectionist lean that may drive import costs up in select sectors. Importantly, tariffs are not charges absorbed at the sales counter—they are levied at entry, raising costs for distributors and wholesalers. These effects do not show up simultaneously in CPI data but unfold gradually as higher operating costs drip into final pricing. Should this line of policy hold firm, estimates of forward inflation could need revisiting.
Trade dynamics have shifted somewhat since the original wave of tariffs was enacted. North America now commands a large share of import flow into the US, with Mexico at the top of that list. We view this not only as a trade data point, but as a risk clue—further trade restrictions here would not be isolated in their consequence. It’s likely we’d see ripple effects across transport, logistics, and input-heavy industries.
Volatility, both realised and implied, should remain directional near data releases. Markets remain sensitive to rhetoric around monetary policy and trade. Pricing in options appears increasingly asymmetrical, with skew building in short-dated contracts. For volatility traders, calibration will be vital—especially with low visibility into geopolitical risk premium and policy-driven FX swings.
As these probabilities shift toward rate cuts and renewed fiscal dynamics, the short end of the curve becomes more reactive. Positioning should reflect that—with strategies that can handle both the repricing of macro expectations and short-term policy shifts.
