Dollar firmer on US-China ‘de-escalation’

The US and China have reported “substantial progress” following trade talks over the weekend, including an agreement to substantially reduce tariffs on each other for 90 days. (This will see the US lower tariffs on China from 145% to 30%, and China reduce tariffs on the US from 125% to 10%). Not surprisingly, the dollar is on the front foot this morning. The euro and sterling are both down more than a cent from Friday’s closing levels against the US currency, trading at about $1.1120 and just below $1.32 respectively. The pound gained around half a penny against the euro last week, most of this coming after Thursday’s Bank of England rate announcement, and is firmer again this morning, at about £0.8430.

In government bond markets, yields rose for a second consecutive week. US and UK yields were about 5-7bps higher, as Fed and BoE rate cut expectations were pared back, while German yields increased by 2-3bps. Yields generally are higher again this morning on the back of US-China developments. The latter also sees European stocks open in positive territory this morning, up 2%, while the futures market points to sizeable gains for US equity markets when they open later today.

In a speech over the weekend, Fed Governor Barr said “higher tariffs could lead to disruption to global supply chains and create persistent upward pressure on inflation,” while also resulting in “higher unemployment as the economy slows.” She also indicated that it is appropriate for the Fed to keep interest rates on hold for now.

In terms of economic data for the week ahead, notable releases include CPI inflation and retail sales in the US on Tuesday and Thursday respectively, and the Q1 labour market and GDP reports in the UK, also due Tuesday and Thursday respectively