The US dollar looks set to snap a three-day losing streak and stock market futures are climbing ahead of the North American open after Beijing and Washington said trade talks between China and the United States are set to begin this weekend. According to statements released by both governments, US Treasury Secretary Scott Bessent and Trade Representative Jamieson Greer will meet with Chinese Vice Premier He Lifeng in Switzerland, marking the first confirmed high-level contact between the two sides since late January – and the first formal discussion since President Trump imposed 145-percent tariffs on imports from China.

Based on anecdotal evidence, it is clear that markets think a de-escalation is in the offing. The consensus expects the overall average effective tariff rate on US imports – around 28 percent when calculated on a pre-substitution basis this morning – to fall to around 10 percent by mid-summer, exerting meaningful, but not devastating, drag on the American economy in the years ahead. Overall consumer price levels are seen rising sharply as existing inventories are wound down, and are then believed likely to plateau as supply chains are reorganised*.

This afternoon’s Fed decision should be a non-event. Although consumer and business surveys are unmistakably pointing to a slowdown ahead, the hard numbers that typically drive policy changes – shifts in employment, consumer spending, financial conditions, and inflation – are still holding up. Officials are inclined toward waiting to see whether tariffs remain in place at current levels, and how the economic effects of the Trump administration’s trade war play out before making adjustments to interest rates.

But Powell’s words during the press conference could nonetheless force a modest recalibration in expectations ahead of the central bank’s next two meetings. The chair is highly likely to open with a reiteration of previous statements — noting that current policy settings are appropriate, that keeping inflation expectations anchored remains the most important area of focus, and that labour market strength should give policymakers time to assess evolving conditions before making a move – but he could also follow Governor Waller in indicating that the Fed is prepared to move aggressively if signs of weakness do appear. Investors are currently assigning one-in-three odds to what might be considered a “pre-emptive” move in mid June, but the probabilities rise to two-in-three by July, suggesting that stronger evidence of a downturn is expected to arrive in the form of hard data before then.

The euro is still on the defensive after German Chancellor Friedrich Merz was confirmed in an unexpectedly-difficult vote, raising questions about his capacity to deliver on the fiscal stimulus that has transformed the outlook for the European economy this year. The head of Germany’s ruling coalition initially failed to secure backing for what is normally a routine confirmation vote on Tuesday, suggesting that his support base is fragile, and that he could struggle to gain approval for the specific spending initiatives that are required to push money into the economy in the near term. After decades of seeing stimulus efforts founder on the rocks – in Germany and elsewhere – we suspect that a sense of disappointment could set in over the months ahead, limiting the euro’s capacity for gains against a weakened dollar.

The Canadian dollar is trading on a more supportive footing after Prime Minister Mark Carney’s first meeting with President Trump appeared to go well, reducing the risk of another cross-border spat over tariffs. The two leaders demonstrated surprisingly good rapport – even when the president said he would “never say never” when talking about turning Canada into the 51st state, and Carney replied “never, never, never, never, never”. Trump called the US-Mexico-Canada Trade Agreement (NAFTA 2.0) a “good deal for everybody,” and appeared to acknowledge that it could remain in place, saying that “It was actually very effective and is still very effective, but people have to follow it – and that’s been a problem”.

Data released earlier yesterday showed Canadian goods exports to the US fell in March, but the loss was – likely temporarily – offset by a jump in trade with other countries. Shipments across the 49th Parallel plunged 6.6 percent month-over-month while deliveries to the rest of the world climbed 24.8 percent, suggesting that global supply chains were rebalancing after an early-year surge in goods movement into the US. The data may underline the diversification opportunities available to Canadian exporters, but a big-picture view shows that it is not possible to fully replace US demand by shifting to a global customer base: even in a month heavily skewed by bullwhip effects, the US absorbed 65 percent of the country’s exports.

*I’d call this “transitory” inflation, but wouldn’t want to trigger anyone.