Dollar treads water as markets squint through the London trade deal fog

This week, the dollar has been floating in no man’s land, caught between cloudy global diplomacy and fragile domestic headwinds. The much-hyped US–China trade summit in London hasn’t delivered a clear directional catalyst, leaving G10 FX markets to dance to the tune of local idiosyncrasies. The headline? Negotiators claim to have agreed on a “framework” to restart sensitive exports—including rare earths—pending the rubber stamp from Presidents Trump and Xi.

From a market sentiment perspective, it’s a light nod toward de-escalation, but let’s not kid ourselves—this wasn’t a breakthrough, it was a handshake over old coffee. China is still dodging any meaningful commitment to narrowing its trade surplus, leaving U.S. hawks with plenty of ammunition to stall structural descalation. What we got was optics over outcomes.

The FX market saw a slight ripple just after midnight UK time as the deal hit the wires, but the bounce faded quickly. The dollar and renminbi barely flinched, with traders parsing through jargon about "export controls possibly coming down" while waiting for tangible deliverables. Commerce Secretary Howard Lutnick noted Trump had been briefed, implying a high likelihood of approval, but forward momentum remains elusive. No dates. No metrics. Just more "framework."

In short, the London summit smells more like a diplomatic holding pattern than a green light.

The dollar, which often trades as a clean proxy for trade sentiment these days, is reflecting that cautious mood. It’s holding up, but not extending the gains sparked by last week’s summit announcement. According to our short-term valuation model, the greenback still screens as 3-4% undervalued versus major G10S—but price action suggests the market wants proof, not promises.

Domestic factors aren’t offering much lift either. Monday’s 3-year Treasury auction was underwhelming, putting a dent in the recent bond bid. That pressure extends into today’s key 10-year auction and CPI print, if you're thinking of a softer outcome than the 0.3% consensus, which could ease some duration stress but simultaneously weigh on the dollar by reviving the Fed pivot narrative.

Later in the day, the May federal budget balance will also come into play—another reminder of just how unflattering U.S. fiscal math has become.

Adding a new twist to the dollar’s narrative: chatter that Treasury Secretary Scott Bessent is in the running to replace Powell. That’s not just noise—it’s a flashing red light for dollar bulls. Bessent is viewed as a monetary dove in Trump’s image, and markets have no appetite for blurred lines between fiscal and monetary policy. Fed independence remains sacred ground. If Bessent’s name continues to trend, expect the greenback to cling to it like an anchor.

Bottom line: Our bias is tactically bearish on the dollar. Between soft inflation, shaky bond demand, and political risk surrounding the Fed chair, the path of least resistance is down, at leastin the near term. Mind you, I don’t have any big directional plays on.

The euro's playing second fiddle this week, with almost all movement coming courtesy of U.S. drivers. Still, ECB speakers are keeping the hawkish torch lit. Hence, the EUR/USD remains buoyed by the momentum from last week's hawkish ECB announcement, with minor support at 1.1400 and upside potential toward 1.1500 if dollar weakness persists or a soft CPI print is reported.

Meanwhile, USD/JPY has been grinding higher, supported by calm in the JGB market and speculation that the BoJ could soon taper its bond-buying program. There was brief chatter about the Ministry of Finance buying back bonds, but that’s now been denied. Still, the yen remains vulnerable in a risk-on higher US yield environment. Unless the BoJ rolls out a hawkish surprise—or inflation heats up enough to force their hand—JPY could continue to drift lower on rate differentials alone. Recall yesterday’s note: When Volatility Sleeps, Carry Still Pays the Rent.

This week’s story is one of positioning rather than conviction. Trade headlines are shallow, data is pending, and the Fed is still whispering rather than shouting. For the dollar, it’s a case of death by a thousand uncertainties. For the rest of the G10, it’s all about who can capitalize on the next dollar misstep.

Stay nimble. Keep one eye on CPI, the other on the bond market—and don’t fall for the smoke and mirrors coming out of London. Until we see actual signatures, cargo manifests, or policy changes, this market is trading on noise, not news.