US Dollar Forecast: DXY Retreats After Inflation Undershoots and Trade Tensions Ease

Dollar Drops as CPI Undershoots, Tariff Truce Sparks Broader Risk Bid

The U.S. Dollar Index fell on Tuesday, retreating after a four-day advance as cooler-than-expected April inflation data and a U.S.-China tariff rollback weakened demand for the greenback. With risk sentiment recovering and Treasury yields mixed, the dollar came under renewed pressure across major pairs.

At 15:20 GMT, DXY is trading 101.209, down 0.569 or -0.56%.

Inflation Surprise Undermines Dollar Rebound

April’s CPI release showed headline inflation rising just 0.2%, below the 0.3% consensus, while the annual rate eased to 2.3%. Core inflation held steady at 2.8%. This soft print added weight to expectations that the Fed may remain patient, though rate cut pricing has moderated. Fed funds futures now reflect 56 basis points of cuts for the remainder of the year, sharply down from the 100+ basis points forecast a month ago.

Treasury yields reflected this mixed view. The 2-year yield edged down to 3.994%, while the 10-year held near 4.48%. The Fed remains data-dependent, and April’s inflation report—while not a game-changer—fails to reinforce the urgency for immediate easing.

Trade Truce Boosts Risk Assets, Saps Dollar Demand

The dollar’s weakness also stems from renewed global risk appetite following the U.S.-China agreement to suspend reciprocal tariffs for 90 days. Tariffs on both sides were slashed—U.S. duties on Chinese goods cut to 30% from 145%, and China’s tariffs dropped to 10% from 125%. This relief rally fueled gains in equities and commodities, pulling capital away from defensive dollar positions.

The easing of trade tensions also undermines one of the key arguments for aggressive Fed cuts. As economic risks appear to lessen, the Fed may feel less urgency to respond, reinforcing a “wait-and-see” stance.

Sterling Recovers, Euro Remains Pressured

Sterling clawed back losses, rising 0.26% to $1.3211. Traders largely ignored local wage data and looked ahead to the upcoming U.K.-EU summit and April services CPI. Meanwhile, EUR/GBP slipped to 84.06 pence, its lowest since early April, continuing its pullback from the late-April peak.

Market Outlook: Dollar Softens, But Reversal Lacks Follow-Through

While the U.S. Dollar Index pulled back after testing the 102 handle, the broader structure remains fragile. The recent recovery off the May low of 99.17 faces credibility questions without stronger inflation or growth signals. The 50-day and 200-day moving averages overhead—at 102.00 and 104.28, respectively—remain materially unchallenged. With external pressures easing and domestic data cooling, dollar strength may remain capped unless the Fed signals otherwise.

More Information in our Economic Calendar.