On Tuesday, the US dollar index fell back, but still stood above the 106 mark, and finally closed down 0.36% at 106.28. As of now, the US dollar is quoted at 106.51.
US President Trump announced an investigation into the copper industry. Officials said Trump prefers to impose copper tariffs rather than quotas. The copper industry is a national security issue. Based on the forecast of electric vehicle and Al demand, there will be a shortage of copper. The investigation schedule is undetermined and the tariff level is undetermined.
British media: Ukraine agreed to the US mineral agreement after the US gave up its demand for $500 billion in potential revenue; foreign media revealed that the Ukrainian cabinet suggested signing a mineral agreement on Wednesday; US Treasury Secretary Benson said: I hope to establish a partnership with allies in the field of mineral processing.
US consumer confidence in February hit the largest monthly decline in more than three years, and pessimism about the future returned. According to the data from the Conference Board, the consumer confidence index fell 7 points to 98.3 in February, and the expectations index fell 9.3 points to 72.9. This is the first time since June 2024 that the expectations index has fallen below the critical value of 80, which indicates an economic recession.
The US House of Representatives plans to conduct a large-scale review of the Fed's interest rate hike decision to assess whether inflation should take precedence over employment.
US Treasury Secretary Benson said: The 10-year US Treasury yield should "naturally" decline, and the economy should be "re-privatized". Tariffs have three major goals.
Supported by comments from US President Trump or his government, the US dollar index is clearly not included in traders' decisions. Stocks, gold and bonds are all volatile, and the risk of the US dollar index is too great and is currently being put aside by traders.
On the upside, the 100-day moving average (SMA) may limit bulls to buy around 106.68. From there, it may rise to 107.35, which is a key support level in December 2024 and January 2025. If US Treasury yields pick up and move higher again, it may even test 107.97 (55-day moving average).
On the downside, the 106.52 (April 16, 2024, high) level currently has a false breakout. However, it does mean that quite a few stops may have been triggered in the market and some longs have been washed out of their positions. It may take another move lower to entice those dollar longs to re-enter at lower levels, perhaps closer to 105.89, or even 105.33.
The minutes of the Fed's January meeting showed that officials remained cautious about cutting interest rates without further progress in inflation. The Fed pointed to risks posed by trade policy changes, immigration restrictions, and geopolitical developments. After three rate cuts last year, the current policy stance is less tight, which gives them more time to assess economic conditions.
A key concern is the potential inflationary impact of Trump's proposed tariffs, which could lead businesses to pass on higher costs to consumers. Although some policymakers are optimistic about these trade policy changes, most see them as obstacles to returning inflation to the 2% target. The federal funds futures market currently prices in about 40 basis points of rate cuts in 2025. However, with inflation still above target and new tariffs posing upside risks to prices, the Fed is likely to remain patient before resuming rate cuts. Housing inflation should continue to moderate, however, lowering overall inflation in the coming months. While job growth has slowed, we believe it remains strong enough to support consumer spending without reigniting inflation concerns. Moreover, maintaining economic growth while reducing inflation remains a top priority for Trump. Given the political risks associated with high inflation, the administration is unlikely to pursue a sustained and aggressive tariff policy that could reignite price pressures, depress growth, and disrupt markets.
Given that the Fed still sees its monetary policy as restrictive, meaning rate cuts will be needed at some point in the future, we continue to expect two rate cuts in 2025. We favor U.S. equities and high-quality fixed income assets, including five-year Treasuries and investment-grade corporate bonds.
Regarding US data, Friday’s personal income (+0.3% expected, +0.4% prior) and consumption (+0.2%, +0.7% prior) reports will be the main focus, as this will also provide the latest reading of the Fed’s preferred inflation indicator, the core PCE deflator (+0.27%, +0.16% prior). Income and consumption growth in January are likely to be soft relative to recent performance, mainly due to weather-related issues and the Los Angeles wildfires. As we have previously noted, while the CPI came in well above expectations in January, the component of the PPI that reflects the core PCE was slightly soft.
Assuming our core PCE forecast is close to actual, the year-on-year growth rate of the series should fall by 0.2% to 2.6%, although there are some revisions in the PPI data that could pose some upside risks. Nonetheless, Fed officials are unlikely to take inflation progress for granted
In the United States, we expect real GDP growth to be higher than market consensus at 2.3% for the full year 2025, reflecting continued healthy consumption growth supported by strong real income growth, as well as strong residential and commercial fixed asset investment. We expect core personal consumption expenditure (PCE) inflation to remain relatively stable this year, reaching 2.6% at the end of the year, as further deflationary effects from rebalancing of the auto and housing rental markets are offset by a modest boost from higher tariffs. We expect the unemployment rate to stabilize at 4.0% by the end of 2025.
We expect the Fed to cut interest rates by 25 basis points each in June and December this year, followed by another 25 basis point cut in June 2026, and the final interest rate range will be reduced to 3.5-3.75%, although we believe there is still a lot of uncertainty as to whether the Fed will cut interest rates further this year. On balance sheet policy, we expect the Fed to slow the pace of balance sheet reduction in May and end it by the end of the third quarter.
A sharp drop in U.S. bond yields has put more pressure on the dollar as investors bet that slowing economic growth will force the Fed to cut interest rates - inflation be damned. The 10-year Treasury yield fell to 4.28% on Tuesday, the lowest level since mid-December last year. The reason is that a series of weak data showed that U.S. consumer and business confidence is declining, and the initial soft landing narrative is quickly turning into a hard landing reality. The shift has weakened the dollar and dashed expectations that Trump's return to the White House would continue to strengthen the dollar. Traders initially bought the dollar heavily on the premise that Trump's tariffs and immigration restrictions would increase inflation and force the Fed to remain hawkish. But as growth concerns take center stage, this optimistic argument has begun to unravel. So what is the real problem for foreign exchange trading now? The impact of a slowing U.S. economy on the global economy, and how traders can position for the next move. The dollar has a complicated love-hate relationship with risk sentiment - it strengthens during periods of heightened uncertainty concerns, but weakens when investors begin to price in big rate cuts. The key thing we need to watch now is: is this bond rally driven by safe-haven demand, or is it simply a dovish repricing of Fed expectations? If it's the former, the dollar may actually find its footing as investors turn to U.S. assets for stability - even if the yield curve is flat. But if it's the latter, and markets continue to "pivot trade" around Fed policy, then the dollar may continue to be under pressure.