Dollar pulls back on new tariff threats; RBA decides on rates

US import prices rebound, UoM inflation exp. climb

The US dollar traded higher against most of its major peers on Friday after data showed that US import prices rebounded in April, and as the one-year inflation expectations of the University of Michigan climbed to 7.3%.

Following the trade agreement between the US and China, recession fears have eased, and market participants seem more concerned about the upside risks to inflation. Therefore, another strong jump in the UoM inflation expectations corroborates the view that the Fed should not cut interest rates aggressively. Indeed, from pencilling in more than 100bps worth of reductions this year just after Trump’s ‘Liberation Day’, investors are now expecting only 52, virtually matching the Fed’s latest ‘dot plot’.

Moody’s downgrade and Bessent’s threats

Having said all that though, the greenback pulled back today, as market participants had to digest a surprise downgrade of the US government credit rating by Moody’s and after US Treasury Secretary Scott Bessent said that President Trump will impose tariffs at the rate he promised on ‘Liberation Day’ on trading partners that do not negotiate in “good faith”.

However, a Financial Times report noted that the US has started negotiations with the EU, helping to ease concerns and raising hopes that, following recent agreements with the UK and China, more deals may be on the way. President Trump has previously said that the US is close to agreeing with India, Japan and South Korea as well.

Risk sentiment deteriorates, but no signs of panic

On Wall Street, all three of its main indices closed in positive territory on Friday, but stock futures are pointing to a lower open today. Contracts on the Nasdaq 100 are down 1.4% today. The shift in market sentiment at the start of the week is also reflected in gold prices, which have slightly rebounded today.

That said, investors are showing little concern about a potential recession, as reflected in Fed funds futures which show only two quarter-point reductions by the end of the year. Investors may get more clarity on that front this week as several Fed policymakers are scheduled to speak this week. Among the speakers will be New York Fed President John Williams, Atlanta Fed President Raphael Bostic, Dallas Fed President Lorie Logan, and San Francisco Fed President Mary Daly.

BoJ could hike again, RBA expected to cut

The yen is among the main gainers today and this may be due to remarks by the BoJ’s deputy governor Shinichi Uchida who said that the Bank will continue to raise interest rates if the economy rebounds after the previous quarter’s contraction. His comments come on top of the strong acceleration in the Tokyo CPI figures for April, allowing investors to assign a strong 70% chance of another quarter-point hike by the end of the year.

Speaking of central banks, during the Asian session Tuesday, the RBA will hold its first decision since Trump’s ‘Liberation Day.’ The overall uncertainty surrounding Trump’s trade policies has led investors to pencil in around 75bps worth of rate cuts by the end of the year. For tonight, a quarter-point reduction is nearly fully factored in. Thus, traders may direct their attention to clues and hints about how policymakers are planning to move forward.

With underlying inflation metrics near the upper bound of the Bank’s 2-3% target range and taking into account the Sino-US trade deal, policymakers are unlikely to corroborate the ultra-dovish market consensus. A less-dovish-than-expected message may allow the aussie to gain some more ground.