Dollar Slips Before Inflation Report, US–China Tariff Deadline

Introduction

The US dollar weakened in early Monday trading as investors shifted to a cautious stance ahead of a high-stakes week featuring critical US inflation data and the expiration of a US–China tariff truce. With geopolitical tensions simmering and markets bracing for potentially market-moving economic releases, forex traders are recalibrating positions across major currency pairs.

Dollar Weakness Signals Risk Reassessment

The US Dollar Index (DXY) slipped by 0.25% in early European trading, retreating from last week’s highs. This move reflected a broader market sentiment shift, as traders hedged against the risk of downside surprises in the upcoming July Consumer Price Index (CPI) and Producer Price Index (PPI) reports.
Analysts note that while recent US economic data has painted a resilient picture of the American consumer, inflation remains uncomfortably sticky in certain sectors—fueling speculation about the Federal Reserve’s policy path into year-end.

Inflation Data in Focus

The July CPI, due Tuesday, is forecast to rise 3.2% year-on-year, up from 3.0% in June, largely on the back of energy price volatility and persistent housing cost pressures. Core inflation, excluding food and energy, is expected to remain steady at 3.4%. The PPI report, due Thursday, will provide further insight into pipeline price pressures and their potential pass-through to consumer prices.
A hotter-than-expected CPI or PPI reading could strengthen the dollar by reviving expectations of an additional Fed rate hike in September. Conversely, softer prints would likely encourage risk-on sentiment and extend the dollar’s slide.

US–China Tariff Truce: The Geopolitical Wildcard

Compounding market uncertainty is the expiration of the US–China tariff truce on Tuesday. The truce, established in April to de-escalate trade tensions, temporarily suspended planned tariff increases on billions of dollars’ worth of goods.
Failure to extend the agreement could reignite a tit-for-tat tariff escalation, directly impacting supply chains, commodity flows, and bilateral trade volumes. For forex markets, a breakdown in negotiations could trigger safe-haven flows into the Japanese yen and Swiss franc while pressuring risk-sensitive currencies like the Australian and New Zealand dollars.

Currency Market Reactions

EUR/USD edged higher to 1.0960, buoyed by broad dollar weakness and modestly improved eurozone industrial output data.
USD/JPY dipped to 142.80 as traders sought yen safety ahead of the tariff deadline.
AUD/USD climbed to 0.6695, reflecting optimism over potential Chinese stimulus measures.
GBP/USD advanced to 1.2805 after Bank of England officials signaled a cautious but persistent anti-inflation stance.

Commodity Cross-Currents

The dollar’s pullback lent short-term support to commodity prices:

Gold rose 0.4% to $2,385/oz, rebounding from last week’s sell-off.
WTI crude oil traded around $77.50/bbl, supported by supply concerns despite demand headwinds.
Copper gained 0.6%, reflecting positive sentiment around China’s infrastructure spending.

Market Outlook

The interplay between US inflation data and US–China trade negotiations will dominate market direction this week. Traders should expect heightened volatility in currency pairs linked to trade-exposed economies, particularly the AUD, NZD, and emerging-market currencies.
For now, the bias in the dollar appears mildly bearish—pending confirmation from inflation prints and any last-minute diplomatic breakthroughs between Washington and Beijing.