US, China trade "handshake for a framework" not generating enthusiasm in Asia trade

The US dollar is gaining strength against the Euro, Australian dollar, New Zealand dollar, and British pound, while the Canadian dollar, Yen, and Swiss Franc remain relatively stable. Despite a previously agreed-upon framework between the US and China to lower tariffs, skepticism remains in the market due to the need for presidential approval and the fact that tariffs are still in place. Market activity is subdued ahead of the US CPI data release on Wednesday, where core inflation is expected to be just under 3% year-over-year.

Analysis

The US dollar is exhibiting strength, appreciating against the Euro, Australian dollar, New Zealand dollar, and British pound, while the Canadian dollar, Japanese yen, and Swiss franc remain relatively unchanged. This forex dynamic unfolds against the backdrop of a reported US-China "handshake for a framework" in Geneva aimed at lowering tariffs, an agreement that notably requires subsequent approval from both US and Chinese leadership. Market sentiment towards this trade development is skeptical, evidenced by risk-sensitive currencies ("risk FX") facing more selling pressure than buying interest. This caution, reflected in a moderately negative sentiment score of -0.35 and a cautious market tone, stems from the preliminary nature of the announcement—an agreement to implement a framework for an already agreed-upon deal, contingent on leadership approval, and the continued existence of current tariffs. Market activity is subdued as participants await key US Consumer Price Index (CPI) data due Wednesday, with expectations for core CPI just under 3% year-over-year; Bank of America and Morgan Stanley are noted as having expectations for this inflation metric.

Key Decisions for Investors

• Investors should closely monitor the upcoming US CPI data, as a deviation from the anticipated sub-3% core inflation figure could significantly impact market sentiment and monetary policy expectations.
• The preliminary nature of the US-China tariff agreement, contingent on leadership approval and with existing tariffs still in place, warrants a cautious approach; significant market re-rating based solely on this development appears premature.
• Given the observed US dollar strength and selling pressure on risk-sensitive currencies like the EUR, AUD, NZD, and GBP, consider reviewing currency exposures and evaluating defensive positioning.