The US dollar is gaining strength as the euro, Australian dollar, New Zealand dollar, and British pound fall. Meanwhile, the Canadian dollar, yen, and Swiss franc are holding steady. A framework has been established with China, aiming to implement the Geneva agreement to reduce tariffs. The risk foreign exchange market is seeing more offers than bids. Tariffs are still in effect, as a U.S. appeals court has ruled they can remain during ongoing legal challenges. Participants in the market are skeptical about risk FX, and trading has been quiet as traders await US data releases. The US Consumer Price Index (CPI) data will be released on Wednesday, with the core CPI expected to be just below 3% year-over-year. Bank of America and Morgan Stanley have their own predictions for the May US CPI report. Goldman Sachs warns that tariffs could raise inflation, even if pressures from other sources diminish. Current trends in currency pairs show a preference for safety over higher yields, as the dollar remains strong while typically riskier currencies decline. This shift suggests caution ahead of the U.S. inflation data, especially the Consumer Price Index coming midweek. With expectations for a core reading just under 3%, traders, including us, are paying close attention to any forward guidance and potential surprises. Goldman’s insights on tariffs indicate inflation might remain stubborn. While supply chains are slowly adjusting, any extension or strengthening of tariffs could increase costs for producers, which may then impact consumer prices. This situation creates uncertainty for rate markets, especially regarding terminal rate expectations and potential cuts. It’s important to keep a close eye on both realized and implied volatility. A low-volatility environment can be deceptive, as events like the CPI release or Fed comments can lead to sudden changes. Right now, the caution in risk-linked currencies suggests that demand for hedging is rising, with some traders leaning towards US rate support and dollar strength as a safer option. Additionally, the legal ruling in favor of maintaining current tariffs—despite ongoing appeals—will likely dampen expectations for quick reversals. Traders focusing on short-term cross-currency strategies should remember that until there is a significant legal shift, pricing for goods and global indexes will stay constrained by these tariffs. In the meantime, Canadian and Japanese currency pairs are trading in tighter ranges, likely due to central banks nearing policy thresholds and stable data. These pairs could be useful for relative value strategies as overall volatility in the G10 increases. Ultimately, the response to Wednesday’s data is likely to influence both rate expectations and trading trends in the next couple of weeks. While asset managers are cautious, volatility in options markets suggests that if expectations change, trading positions could shift rapidly. Traders should adjust their sizing and leverage as needed. Medium-term strategies that depend on easing inflation should be approached carefully—especially if tariff impacts appear in June data. For weekly strategies, it might be wise to adopt tighter risk-reward setups to allow for quick reactions without excessive exposure. Lastly, pay attention to any revisions and how the Fed’s messaging aligns later this week. The CPI report is part of a larger policy discussion. Understanding not just the overall number, but also the details—like shelter, used vehicles, and medical services—can provide valuable insights into whether price changes are widespread or limited to certain categories.

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