Inflation Test Meets Tariff Turbulence — FX Markets Brace for a Volatile Week

Inflation Test Meets Tariff Turbulence — FX Markets Brace for a Volatile Week

Market Snapshot

The new trading week opens under a cloud of U.S.–China tariff brinkmanship and a docket that delivers a clean sweep of inflation, labour-market and growth prints from the world’s major economies. Treasury yields are steady but bid-up energy prices and a sub-105 dollar index signal that policy-rate expectations could swing sharply once hard data arrive.

Dollar Dynamics: Caught Between Tariffs and Data

Friday’s dip in the DXY reflected profit-taking after President Trump’s 80% tariff remark and the Fed’s “high-uncertainty” mantra. St. Louis Fed President Alberto Musalem’s warning that “committing now to rate cuts risks underestimating persistent tariff-inflation” underscores why a single hot CPI read could revive speculation of a higher-for-longer stance.

Tuesday, 13 May — The Double Feature

UK labour-market figures hit the tape before the London open. Economists look for the unemployment rate to tick up to 4.5% and employment to rebound by +206k, a mix that could cool wage inflation yet leave the Bank of England watching services-CPI momentum.

Two hours later, U.S. April CPI is expected at 0.3% m/m and 3.6% y/y on the core. Anything faster risks re-pricing the Fed path, lifting front-end yields and the dollar; a miss drags the greenback toward the 104 handle and revives carry trades in higher-beta FX.

Trading read-through: Cable sits on its 21-DMA (1.3290). A soft UK jobs print paired with firm U.S. CPI opens a window for 1.3150; the opposite mix targets 1.3400.

Risk Radar: Speakers & Trade Talks

Fed governors Cook, Hammack and Musalem speak late Monday, while Chair Powell has top billing after Thursday’s U.S. retail-sales release. The tone since last week’s FOMC is one of tactical patience; markets will dissect every adjective for hints that tariffs are nudging the “sustained disinflation” narrative off-course. BoE Governor Andrew Bailey and Chief Economist Huw Pill offer a UK counterpoint after last Thursday’s 25 bp cut, with Bailey stressing that rates are “not on autopilot” in a world of tariff-induced demand shocks.

Currency Scorecard

Cross-Asset Pulse

• Rates: The U.S. 2s–10s curve at +50 bp prices just one 25 bp Fed cut this year; a miss on CPI could steepen to +65 bp.
• Equities: S&P 500 closed a whisker from record highs; Energy and Industrials lead on reflation hopes.
• Commodities: Brent near $87 after a 1.9% pop; Gold steady above $2,200 as real yields soften.
• Crypto: Bitcoin inches back toward $73k, mirroring the broader risk bid.

Key Risks to Monitor

• Tariff headline risk during the weekend U.S.–China meetings
• Core-goods inflation surprise linked to intermediate-goods duties
• BoE communications gap — any hint that the May cut was “one-and-done” would re-price SONIA curves and supercharge sterling
• Liquidity pockets — U.S. options expiry coincides with CPI day; gamma hedging can exaggerate intraday swings

High-Impact Calendar (GMT)

• Tue 13 May – 06:00 UK Jobs | 12:30 US CPI
• Thu 15 May – 06:00 UK Q1 GDP & March GDP | 12:30 US Retail Sales, Initial Claims | 18:00 Fed Chair Powell
• Fri 16 May – 23:50 JP Q1 GDP (SAAR consensus −0.2%) | 14:00 US Michigan Sentiment, Housing Starts

Bottom Line

FX volatility is coiled. A mild upside CPI surprise alongside tariff sabre-rattling would reinforce dollar resilience, especially versus the yen and the loonie. A benign inflation print, a soft UK unemployment rate and signs of progress in China talks could flip the script, taking EUR/USD toward 1.14 and USD/JPY back into the low-140s. Position accordingly, keep stops agile, and watch Powell’s tone for the final verdict.