Markets are trading with a sense of relief this morning. Late yesterday, President Trump said he had no intention of firing Fed Chair Powell and remarked that the 145% tariffs on China could be reduced substantially following a trade deal. The US Dollar (USD) jumped on the headlines, opening firmly in Asian trade, but gains did not stick and the index is trading net lower on the day now, Scotiabank's Chief FX Strategist Shaun Osborne notes.

USD edges back after early Asian gains

"The Japanese Yen (JPY) and Swiss Franc (CHF) are underperforming, however, and stocks and bonds are firmer. Backing off the president’s criticism of the Fed is a positive (but there is a history of animus going back to 2018 which suggests tensions with the Fed chair may remain close to the surface). The positive spin on trade reflects the reality that, at this point, the US may need an off-ramp more than China does. The Chinese leadership has not picked up the phone for the White House by some accounts and talks with China on trade have not been held even at low diplomatic levels."

"It seems that there is little appetite in China to make concessions and any agreement is a long way off. Relief for the USD may be temporary as trade uncertainty will continue to shade US economic prospects. Indeed, US April PMI data are released at 9.45ET and are expected to reflect tariff headwinds. The Manufacturing index is forecast to slip back under 50 while services and the composite readings are forecast to ease a little from March but remain in expansion territory. Note that US economic surprises are tracking weaker (i.e. data coming in below expectations) after improving through much of March and early April."

"There are a number of Fed speakers on tap today, including Governor Waller who has sounded a little more dovish in recent comments (tariff inflation 'temporary'). There’s a USD70bn auction of 5Y bonds at 13ET (yesterday’s 2Y sale was a bit soft and 'indirect' bids plunged) and the Fed’s Beige Book is released at 14ET. Later Japan releases weekly capital flow data. The focus here will be on whether the data reflects selling of foreign (US) bonds. Technical patterns suggest some relief for the DXY following the rebound overnight, but the index has not sustained initial gains and price action retains a consolidative look. Support is 98.85. Resistance is 99.75."