In currency markets, the Japanese yen and Swiss franc experienced declines following a policy reassessment in Washington. The US implemented a 90-day truce, suggesting a pragmatic rather than ideological approach to imports.

The April core CPI data is expected to show a steady 0.3% month-on-month increase, indicating the Federal Reserve may not hasten to cut rates. Additionally, the Fed’s terminal rate for the easing cycle has shifted to 3.50% from 3.00%.

US Small Business Optimism Outlook

US small business NFIB optimism index is anticipated to fall further, but the market may not react strongly due to the recent US-China agreement. The dollar index (DXY) surpassed resistance at 100.80 and could move towards 102.60, though this is seen as a bear market correction.

This correction may not mark the beginning of a major dollar rally, with adjustments in US allocations and dollar hedge ratios likely. Potential asset re-allocation away from the US may be temporarily halted to assess the impact of current uncertainties on economic data.

We’ve seen a reaction in safe-haven currencies after signals from Washington hinted at a less combative stance on trade measures. The temporary easing of import policy pressures has trimmed recent strength in both the yen and the franc. Rather than a broad-based risk-on shift, this reflects repricing of hedging structures and a pullback in volatility-weighted inflows.

Now, markets are squarely looking at US inflation data, specifically the April core CPI, which is forecast to maintain its pace with a 0.3% month-on-month rise. What’s consistent here is the ongoing robustness of underlying consumer prices. That persistent strength, while subtle, makes the case against rapid monetary easing. It supports the narrative that rate cuts are unlikely to come early in the cycle. Rates traders will have to recalibrate their views around the revised terminal point for the Fed — it has quietly moved higher, now expected to stop nearer to 3.50%. That’s a full half-point above prior consensus, and can’t be dismissed as noise.

Dollar Index and Market Positioning

Elsewhere, forward-looking indicators like the NFIB small business sentiment index are drifting lower. But, interestingly, the overall FX positioning doesn’t seem to reflect alarm. That’s likely a reaction to the recent geopolitical thaw rather than an indication of confidence in domestic activity. Realignments that had been in progress — namely, a slow shift of capital out of dollar-denominated assets and away from US risk — now appear paused, if not reversed briefly.

Technically, the dollar index has cleared a familiar level at 100.80, and upward movement towards 102.60 is plausible. However, rather than marking a return to dollar-strength trends, this seems more like a short-covering move within a broader retracement. From our perspective, it’s a bounce consistent with temporary shifts in positioning, not a conviction-led move.

The move higher in DXY doesn’t mean the FX market is refocusing on US dominance. What’s more likely is that funding costs and hedge ratios are being managed with more caution. Asset managers seem to be hedging against data surprises rather than re-entering on the long side in size. If economic releases continue to underline resilience without tipping into overheating, holding volatility-steered positions may be preferred over bold directional bets.

Traders would benefit from monitoring the spacing between policy expectations and realised inflation — particularly through swap markets — as those gaps are where dislocations tend to form. In the coming sessions, reactions to Fed commentary and second-tier macro data might carry outsized influence, not because of the data’s standalone value, but because of their timing within this delicate repricing phase.

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