The foreign exchange market is on edge as investors prepare for the release of US inflation data, which could shape expectations for the Federal Reserve’s rate outlook. At the same time, renewed trade tensions linked to Donald Trump’s tariff discussions have added another layer of uncertainty, keeping traders cautious.
The US dollar remains firm, supported by elevated Treasury yields and speculation that the Fed may delay rate cuts if inflation remains sticky. Economists expect core inflation to hold steady, reinforcing the central bank’s cautious stance. A stronger-than-expected reading could further boost the dollar, while a softer print might revive bets on an earlier rate cut.
Meanwhile, Trump’s trade rhetoric has stirred global markets, raising concerns about potential tariff hikes on key US trading partners. The uncertainty has weighed on risk-sensitive currencies, with the Australian dollar and emerging market currencies under pressure as traders assess possible economic fallout.
The euro and British pound have struggled for direction, with EUR/USD and GBP/USD trading in tight ranges. The European Central Bank (ECB) and Bank of England (BoE) remain in a holding pattern, leaving the dollar’s strength as the key driver for these pairs. Any surprises from the CPI data could determine the near-term outlook for both currencies.
The Japanese yen remains on watch, as speculation around a potential Bank of Japan rate hike has provided some support. However, USD/JPY continues to trade near recent highs, with the dollar’s resilience limiting yen gains despite shifting expectations for BoJ policy.
For now, forex markets remain sensitive to both US inflation and trade policy developments. Unless the data delivers a significant surprise, volatility may persist, with traders closely monitoring Trump’s next moves and the Fed’s reaction to inflation trends.
