Euphoria surrounding the weekend’s US-China tariff climbdown is fading this morning, and the dollar is retreating in the face of a third consecutive monthly undershoot in inflation data. Treasury yields are pushing lower, equity futures are pointing slightly higher, and safe-haven currencies like the Swiss franc and Japanese yen are back to outperforming their risk-sensitive brethren.

Consumer price growth slowed in the United States last month, potentially giving the Federal Reserve more breathing space as it seeks to address slowdown risks in the economy. According to data published by the Bureau of Labor Statistics this morning, the core consumer price index – with highly-volatile food and energy prices excluded – rose 2.8 percent in April from the same period last year, up a smaller-than-estimated 0.2 percent on a month-over-month basis. On a headline all-items basis, prices climbed 2.3 percent year-over-year, decelerating slightly from the 2.4 percent pace set in March, and were up 0.2 percent from the previous month. This amounted to the smallest annual gain since early 2021, and was somewhat slower than consensus forecasts among economists polled by the major data providers ahead of the release.

We’re somewhat surprised by the dollar’s continued underperformance, but it seems that investors may be suffering from post-traumatic stress syndrome. With the risk of a complete breakdown in cross-Pacific trade seemingly taken off the table under this weekend’s “deal”, implied recession odds have fallen sharply from levels reached at the end of April – yet the greenback remains significantly weaker than most of its peers on a year-to-date basis, and American equity markets are trailing their global counterparts. We think the currency is poised for gains as real rate differentials play a more supportive role, but it could take time for the “Sell America” theme to dissipate – and for trust levels to recover.

The British pound is trading on a modestly-firmer footing against the dollar but is lagging most of its developed-market peers after an update showed labour market conditions cooling more quickly than expected, giving central bankers room to continue easing. According to the Office for National Statistics, regular year-over-year pay growth in the private sector – the wage measure tracked most closely by monetary policymakers – fell to 5.6 percent in the three months ended in March, down from 5.9 percent previously and below the 5.7-percent consensus forecast. The unemployment rate ratcheted up to 4.5 percent over the same period. The Bank of England surprised markets with a somewhat-hawkish vote split in last week’s decision – two voters wanted rates to stay on hold at 4.5 percent, while a majority of five supported a quarter-point cut, and two favoured a bigger, half-point reduction – but investors expect slowing price pressures to clear the way for a cut in June or August, with another coming before year end.

Mexico’s peso is holding steady ahead of Thursday’s Banxico policy decision, which is expected to result in a seventh consecutive rate cut. The exchange rate has risen roughly 6.4 percent this year as overall dollar weakness has intersected with Mexico’s recently-acquired safe-haven characteristics – a strong fiscal position, small current account deficit, and high onshore rates – and a relative lack of carry trade-related positioning in currency markets. But this outperformance seems likely to fade as fundamentals – weak growth, fiscal retrenchment, slowing inward remittances, soft investment, and higher tariffs on exports – put pressure on the Mexico-US yield differential that has historically played a strongly-supportive role. The Federal Reserve seen delivering two quarter-point rate cuts over the next year against the six* priced in for Mexico, and this gap could narrow further if growth expectations deteriorate further.

*Inclusive of the two expected on Thursday (a single half-point move)