Tariff truce, CPI crosshairs, and the Dollar’s short leash

The FX market spent the night in a holding pattern, engines idling, waiting for the CPI clock to strike. No fireworks yet — just the kind of quiet you get before a squall, with traders trimming their USD shorts like a sailor reefing sails before landfall. Yesterday’s modest dollar pop wasn’t about conviction buying; it was positioning discipline, a nod to the risk that today’s CPI print could come in hotter than the market’s neat little +0.3% MoM core consensus.

Bloomberg’s poll still says +0.2% headline, +0.3% core — but history reminds us this CPI series has been more wet fuse than stick of dynamite lately, with five straight months of downside core surprises. Tariff pass-through? So far, more bark than bite. Follow-up trade deals have blunted the “Liberation Day” levy shock from April, and last night’s Trump–Xi 90-day tariff truce extension kicked another potential powder keg down the road. No changes to the rules, just a new November 10 deadline, and a subtle signal that a late October handshake in Beijing is on the table. Without the extension, U.S. reciprocal tariffs on China would have snapped back to 54% — a number that makes exporters sweat before breakfast.

Commodity FX didn’t celebrate. The AUD drifted lower after the RBA snipped another 25bp off rates to 3.60% and kept the scissors in plain view. Governor Bullock’s “pre-emptive and data-dependent” line was code for “two more cuts if needed,” with growth forecasts shaved down to 1.7% and inflation expectations still wedged in the 2–3% band. That’s kept AUD/USD locked in its 0.6400–0.6600 jail cell.

The real street theatre comes at 8:30 a.m. New York time. We’re leaning +0.4% MoM core CPI, which would nudge YoY to 3.1% and headline to 2.9%. That’s enough for a USD adrenaline shot, but not enough to stop the Fed from slashing in September if the labor market keeps showing payroll potholes. Tariff-flavored inflation spikes are still seen as transitory — political seasoning, not a structural shift — so even a hot print won’t earn the dollar a marathon rally.

EUR/USD’s path is greased for a drop back under 1.16 on a strong CPI, maybe a run at 1.1500 if geopolitical headlines pile on. That’s where the trade winds get choppier — Trump’s Friday sit-down with Putin, framed now as a “feel-out” meeting, and tomorrow’s call with Zelenskyy are keeping FX traders glancing sideways at the newswires. A surprise thaw in U.S.–Russia–Ukraine tensions could shift the current in the Euro’s favour, but for now, CPI data rules the tiller.

Meanwhile, sterling’s been working the quiet hours with its own tailwind. UK labor data came in less grim than feared — payrolls only off 8k versus much steeper estimates, and prior months revised up. Wage growth cooled to 4.6%, but not enough to dent the MPC’s hawkish turn. The UK rate market’s now a coin flip for another November cut, and higher yields are giving GBP a sturdier hull. EUR/GBP has slipped back below 0.8650, down from late-July’s 0.8769 peak, even if nobody’s calling this a breakout yet.

The setup is simple: CPI decides whether the dollar’s short leash gets yanked or lengthened, tariffs stay holstered until November, and G10 FX keeps trading in its well-worn channels unless geopolitics spills something onto the floor.