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On Monday, the markets breathed a sigh of relief following the announcement of a trade agreement between the United States and China. The deal involves mutual tariff reductions, but only for 90 days.
Trump, true to form, continues maneuvering in his attempt to calm the American public and force China into submission—submission to his will. Washington agreed to reduce customs duties for 90 days. In the West, this move is being called a "truce," clearly reflecting the nature of the current relationship between the two countries: a trade war.
Yes, the markets relaxed, but does this step resolve the core issue of the conflict? Likely not. It appears Trump took this measure because rising domestic prices are weakening his presidential standing amid fierce opposition from his political rivals. This move can also be viewed as a significant retreat in the trade war, indicating that Beijing seems to be gaining the upper hand. While the tariffs imposed vary—30% on Chinese goods entering the U.S. and 10% on American goods entering China—the retreat signifies an ideological defeat for the American president.
Market participants now view this as a temporary development, which may lead to a limited increase in demand for risk assets. After all, once the 90-day period ends, Trump may introduce a new "twist" to his trade policy, potentially throwing markets into chaos. However, it's also possible that under the guise of this truce, the tariffs will remain in place for a longer period, and the fuss surrounding Trump's "victory" will quietly fade away.
Focus Turns to the U.S. Inflation Report
After digesting the truce news, markets focus on the U.S. inflation report. According to consensus forecasts, the Consumer Price Index (CPI) is expected to maintain its annual growth rate in headline and core readings. However, on a monthly basis, a sharp rise is anticipated: the headline CPI is forecast to jump from -0.1% in March to 0.3% in April, while the core CPI is projected to rise 0.3% versus 0.15% previously. Opposition media outlets have already dubbed this rise in inflation as "Trumpflation."
How Might the Markets React?
If the data matches or exceeds expectations, it could support the U.S. dollar, which is already trading above 101.00 on the ICE Dollar Index. This could pave the way for a move above the 102.00 level. At the same time, higher inflation may negatively impact the cryptocurrency market and pressure stock indices, as rising prices would push back investor expectations for an imminent rate cut by the Federal Reserve. On the other hand, if inflation reports are lower than expected, the opposite reaction could occur.
The pair is trading above the support level at 1.1080. A stronger U.S. inflation reading could trigger a renewed decline. A drop below this level would intensify the bearish momentum, potentially causing the pair to fall toward 1.0965. A suitable level for selling the pair could be 1.1092.
The pair is trading below the resistance level at 1.3210. A rise in U.S. consumer inflation could put pressure on the pair and resume its decline toward 1.3085. A potential entry point for selling could be around 1.3180.
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