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Representatives from the United States and China have reached a framework agreement on trade following two days of high-level talks in London. But why isn't there a sense of euphoria in the markets?
The agreements between the delegations followed a phone conversation between Trump and Xi that helped ease tensions between the two countries. A key part of the deal includes China's lifting of restrictions on rare earth metal exports to the U.S., while Washington agreed to ease its recent technology export controls. And that's it. In reality, the agreements addressed only part of the issue and did not fully resolve it. The broader unresolved question is the overall trade relationship between the countries. It appears that investors were hoping for more, which didn't materialize—hence the negative sentiment seen in U.S. stock index futures this morning.
Nothing fundamentally new will likely occur. As mentioned, the overall trade issues between China and the U.S. remain unresolved and will probably stay that way until one side claims victory in this economic standoff.
Today, market participants are focused on the upcoming U.S. inflation report. Both headline and core inflation are expected to rise year-over-year.
Given that the main issue—the U.S.-China economic conflict—persists, today's inflation release could trigger a negative market reaction. A rise in the Consumer Price Index (CPI) would effectively nullify hopes for a Federal Reserve rate cut in the near future. This could trigger a correction in U.S. equities, which could then spread to global markets. In such an environment, the dollar may become a key beneficiary. It is currently holding above the key support level of 98.00 and is testing levels above 99.00 on the dollar index.
Rising inflation may boost demand for the dollar against other major currencies, especially amid falling inflation in Europe and growing labor market concerns in the UK. These factors both weigh on the euro and pound, key components of the dollar index basket.
U.S. Treasury yields have stabilized in anticipation of the inflation report. The data is expected to shed light on the economic impact of tariffs and broader inflationary trends.
If inflation data meets or exceeds consensus expectations, this could trigger a corrective wave in equity markets. It may also weigh on demand in the cryptocurrency market. Gold prices may also come under pressure—although geopolitical tensions and the ongoing U.S.-China trade war continue to offer some support.
In this scenario, the dollar will likely be the primary beneficiary, supported by higher inflation and a stable Fed interest rate outlook. This contrasts with the high likelihood of continued rate cuts by the European Central Bank, the Bank of England, and other major global central banks whose currencies are included in the dollar index.
EUR/USD
The pair is consolidating above the 1.1400 support level ahead of the U.S. inflation report. A local downward reversal could occur if the data meets or exceeds expectations. A drop below 1.1400 may amplify bearish pressure, potentially pushing the pair down to 1.1200. A key level for selling the pair is 1.1385.
NZD/USD
The pair is consolidating above the 0.6020 support level in anticipation of the U.S. inflation release. If the data meets or exceeds expectations, a local reversal downward may follow. A move below 0.6020 could intensify the bearish momentum, potentially driving the pair toward 0.5940. A key level for selling the pair is 0.6010.
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