Global markets are positioning for a retreat in the USD’s haven status as investors pivot toward a potential de-escalation of geopolitical tensions next week. This shift is fuelled by growing optimism that a diplomatic breakthrough in the Iran conflict, coupled with a constructive Trump-Xi summit, will cool the "fear trade" that has bolstered the greenback. As risk appetite returns, traders are unwinding defensive positions in anticipation that reduced global friction will stabilize supply chains and alleviate the inflationary pressures that have dominated the year thus far.
This cooling of geopolitical heat coincides with the Fed’s strategic effort to temper hawkish expectations. Ahead of Kevin Warsh assuming the Fed Chairmanship on May 15, officials have sought to correct market pricing of late-2026 rate hikes by emphasizing an extended pause. Despite a rise in one-year inflation expectations driven by energy shocks from the Iran conflict, Fed officials maintain that current rates are sufficiently restrictive. With long-term inflation expectations and wage growth remaining stable, the Fed is resisting aggressive tightening, a stance supported by today’s cooling labour market data. Nonfarm payrolls are expected to drop to the 50k–100k range for April, a far cry from the robust readings that fuelled the USD’s surge in 2022.
The focal point for a shift in sentiment will be the Trump-Xi Summit in China on May 14–15. The Centre for Strategic & International Studies (CSIS) has framed the agenda as the US’s “Five Bs” (Boeing, beef, beans, Board of Trade, and Board of Investment) versus China’s “Three Ts” (Taiwan, tariffs, and technology). Markets are looking for more than just rhetoric; investors want a concrete mechanism to manage trade relations and limit further tariff escalations, an easing of US semiconductor export curbs, and a release of China’s grip on rare earth shipments. Ultimately, a joint diplomatic signal to provide an “off-ramp” for the Iran conflict is the prize, as reopening the Strait of Hormuz could finally set crude oil prices on a sustainable path below USD 100 per barrel. The one country that looks forward to this taking pressure off its currency is India.
Quote of the Day
“First they ignore you, then they laugh at you, then they fight you, then you win.”
Mahatma Gandhi
May 8 in history
In 1933, Mahatma Gandhi began a 21-day fast protesting British oppression in India.
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