Insights 
VT 
The US Dollar Index (DXY) dropped to 101.50 after US CPI inflation for April cooled to 2.3% annually, contrary to expected forecasts. Core inflation remained steady at 2.8%, fostering speculation of a potential Federal Reserve rate cut by September 2025, with easing anticipated through 2026.
Uncertainties have emerged from vague trade commitments with China and the UK, accompanied by ambitious tax and investment plans from President Trump that lack economic impact details. Despite a tariff reduction headline, effective rates on Chinese goods exceed 40%, leading to scepticism about the recent trade deal’s permanence.
Bearish Tendencies and Support and Resistance Levels
The US Dollar Index showed bearish tendencies, trading around 101.00, with the Relative Strength Index and Ultimate Oscillator in neutral territory. Momentum indicators suggest short-term selling pressure, with collective moving averages indicating a broader bearish trend. Support levels are found at 100.94, 100.73, and 100.63, while resistance is identified at 101.42, 101.94, and 101.98.
The economic tensions between the US and China, referred to as a trade war, stemmed from extreme protectionism and tariffs initiated by President Trump in 2018. Recently reignited by Trump’s return to office in 2025, this ongoing conflict places pressure on global supply chains and impacts spending, indirectly affecting CPI inflation.
With headline inflation falling below expectations to 2.3%, while core remains anchored at 2.8%, markets have interpreted this disinflation as a step closer to eventual easing by the Federal Reserve. Although the central bank continues to signal patience, pricing now leans more decisively towards a cut after the summer of 2025. That timing reveals something specific—investors now see fewer barriers to reintroducing risk into rate-sensitive assets.
Traders in interest rate and FX derivatives have reacted promptly. Option skews in the short end of the U.S. rates curve suggest an increased appetite for downside protection, showing that there’s hedging in place for another drop in the dollar. We’ve also seen volatility premiums rise mildly in the two-year Treasury swaption space, pointing to a shift in sentiment towards more aggressive rate repricing. These reactions aren’t without basis. With momentum metrics signalling overextension in recent dollar rallies, there appears little technical appetite for a broader reversal upward.
Trade Announcements and Their Impact
Powell’s remarks, though restrained in tone, haven’t countered these expectations either. The market no longer trusts rhetoric alone but appears to be weighting hard numbers more heavily now—especially as unemployment starts showing cracks and PCE tracks south quietly.
In parallel, the optimism around trade announcements has quickly worn off. Lighthizer’s latest commentary did little to clarify tariff mechanics or timelines, despite headline proclamations. The effective duty rate on imported Chinese steel, for example, remains above pre-2020 levels, making it hard to view any tariff talk as policy softening. These mixed signals inject unwelcome uncertainty into hedging strategies, particularly in USD/CNH and GBP/USD options, where implied vols have begun ticking upward. Resistance in DXY at 101.94 absorbs any shallow rebounds, making patience key when selecting re-entry points.
The retracement in DXY to 101.00 now carries weight, with some algo-driven strategies triggering down to strong support near 100.63. These mechanical sell layers tend to exaggerate moves once momentum rolls, which remains a risk here. More so as liquidity is thinner than usual, given summer desks are under-resourced and exposure trims are already underway across macro books.
Delving deeper into the technicals, convergence of the longer-term exponential moving averages points to prolonged downside pressure. RSI and Ultimate Oscillator may look neutral, but price action below the 200-day moving average keeps sentiment constrained. Unless we see a meaningful deviation in incoming data—most likely through jobless claims or the next core PCE print—we shouldn’t expect this dollar softness to reverse in the near term. That tempers any strategy relying on short-term dollar recovery.
Among the contributing forces, Beijing remains opaque in its policy response. Hints of potential retaliatory measures against fresh U.S. tariffs circulate, yet confirmation is absent. This leaves energy prices and industrial inputs exposed, which indirectly re-surfaces in inflation-linked asset classes. We’ve noticed breakevens on five-year TIPS move erratically, particularly as hedge funds shift out of bullish reflation trades in commodities. Such moves usually bring sharp reactions in dollar-based derivatives—especially those tied to real rates.
Watching the 100.73 level on DXY becomes essential; a breach there could spark another round of defensive repositioning in both leveraged FX and macro fixed income strategies. We’ve already encountered early unwinds in structured carry trades dependent on USD strength, particularly those against higher-yielding EM currencies. That suggests growing unease about dollar demand holding up into Q3.
Trump’s policy stance, albeit declared with confidence, remains fuzzy on execution. Tax and infrastructure ambitions provide headlines, but bond traders continue to demand wider term premia, reflecting doubts over fiscal discipline. The knock-on effect on longer-tenor yields has been subtle but persistent. This steepening bias affects swap spreads, indirectly pressuring forward guidance expectations via OIS curves.
Through it all, shorter maturity dollar swaps and eurodollar futures display increased sensitivity to minor shifts in inflation data and forward guidance commentary. And for now, implied volatility surfaces in FX skew firmly to the downside.
