Dollar struggles to maintain its recent gains

Dollar is under pressure  

The US dollar is slightly on the back foot again today, having surrendered a decent portion of its Monday gains, as markets try to find their footing after the US-China deal. However, the euphoria following the trade agreement has pushed equities higher, with both the S&P 500 and Nasdaq 100 indices turning positive in 2025.

Interestingly, volatility across major assets has eased aggressively this week. More specifically, the one-month implied volatility of euro/dollar, dollar/yen, and pound/dollar has sunk to a monthly low. Similarly, US equity indices are experiencing the lowest volatility in the past 30 days, despite the impressive weekly price gains.

Upbeat Trump continues to seek a Fed rate cut

Investors are now pondering Trump’s next moves, with the US President remaining upbeat after securing a humongous $600bn economic deal with Saudi Arabia. Meanwhile, the Director of the National Economic Council, Hassett, informed reporters that upon Trump's return to the US, the next trade deal will be announced. It is evident that the US President wants to preserve the current positive market sentiment, but it will be difficult to surpass the importance of the deal with China.

Meanwhile, it looks like Fed Chair Powell remains a big thorn in Trump’s side. The downside surprise in yesterday’s US inflation report gave Trump the opportunity to attack Powell again, repeating his demand for rate cuts. At some stage in the not-too-distant future, the US President might understand that personal attacks tend to have the opposite effect. Until this happens, Powell will probably have to put up with the name-calling.

Two Fed rate cuts priced in for 2025

Interestingly, with inflation apparently losing some steam and the US economy most likely gaining momentum following an abysmal first quarter of 2025, it is not implausible for the Fed to remain on hold during 2025, unless there is a severe deterioration in hard data. Markets are currently pricing in two rate cuts this year, with the first one expected at the September meeting.

Meanwhile, despite the US-China agreement and more trade deals on the way, US Treasury yields continue to climb, with the 10-year yield briefly touching 4.5% during Tuesday's session. Bond investors are concerned about the ballooning fiscal deficit, as they are probably not convinced that tariff revenues could materially impact America’s fiscal profile, especially as the US administration is frantically preparing for the much-discussed tax cuts.

Gold is range trading, oil hovers a tad below $64

Trump’s Middle East trip has apparently set the wheels in motion on a number of fronts. Ukraine and Russia are still discussing, via proxies, the possibility of direct talks in Turkey this week, with the US President potentially making a guest appearance to push both sides into agreeing to a ceasefire and the end of the three-year-old conflict. Additionally, representatives from Iran, France, Germany and the United Kingdom will meet on Friday in Turkey to prepare for the upcoming US-Iran talks.

Meanwhile, gold is struggling to make gains after Monday’s acute correction, hovering inside the tight $3,210-$3,270 range. On the flip side, oil has taken notice of America’s sanctions on firms linked with shipping Iranian oil to China, but has failed to cross above the $64 level, partly due to the olive branch offered to Iran by Trump in order to reach a nuclear deal soon.