The Fed may be frozen, but Asia FX is already pricing the pivot

The Dollar carries excessive negative baggage

You’d think formal U.S.-China trade talks getting locked in for May 10–11 would light a fire under the dollar. Instead, the greenback barely managed a limp 0.5% bounce—and even that quickly faded. The dollar's rally has been underwhelming at best against the big April winners like the yen and Swiss franc, suggesting that the dollar's negative risk premium, yeah, that one everyone in FX land is talking about, remains stubbornly priced into U.S. assets despite equity market relief.

Let’s be clear—this isn’t just about trade. Sure, the prospect of a tariff détente should, in theory, pressure safe havens like JPY and CHF. However, positioning has already stretched long yen, and USD/JPY’s modest bounce hints at a market that is still bracing for policy uncertainty and geopolitical headline risk. And one look at gold pressing against $3,400 suggests the same.

Today, the FX market gets a double dose of U.S. macro theatre: first up is Treasury Secretary Scott Bessent’s congressional testimony at 10:10 AM on the “State of the International Financial System.” Expect boilerplate talk about orderly bond markets and a strong dollar stance. But what’ll really matter is if he’s pushed on currency manipulation in the current trade framework. With USD under pressure (particularly USD/TWD and USD/KRW), there’s chatter about Mar-a-Lago-style diplomacy pushing Asia to strengthen its FX. Any off-script slip from Bessent on this front could be a dollar-negative event. However, the US Treasury’s tolerance for additional broad-based USD weakness remains uncertain, especially ahead of absorbing tariff-induced inflationary pressures. Perhaps we'll find out tonight.

Then comes the FOMC. Expectations are low—Powell is expected to deliver a polished version of “we’re on hold, watching the data.” The stronger April NFP pushed July back into focus as the likely start of the Fed’s next easing cycle, and markets have already walked back ~20bps from the peak cut pricing. But here’s the kicker: if the Fed is no longer pushing dovish surprises, why isn’t the dollar stronger?

Bottom line: Dollar strength is being rationed. Trade talks are a net positive, but the market’s trust in U.S. policy clarity is still broken. Until that chaos gap closes—or hard data collapses and rate cut pricing explodes—expect more of this range-bound, whiplash-prone FX tape.

The narrative that German fiscal expansion boosted EUR/USD in March was easy to sell—and by that logic, the political weakening of Friedrich Merz should have been enough to take a few figures off the board. And yet, here we are: Merz stumbles in his first parliamentary confirmation round, EUR/USD dips to 1.1310, then bounces right back. That’s all you need to know about the state of the long dollar reversion trade; it’s not working right now.

FOMC ( final take)

Let’s be real—the Fed’s about to walk into this meeting, smile politely, and leave everything untouched. No rate cut, no SEP update, no fireworks. With policy rates pinned at 4.25–4.50%, Powell’s going to reaffirm what markets already know: the Fed’s in full “wait-and-see” mode, watching Trump’s tariff shock filter through the real economy like slow poison before deciding whether to grab the rate-cut antidote.

And why would they move now? The April jobs report crushed expectations and shoved any imminent dovish pivot back into its cage. The Fed isn’t going to pre-empt a slowdown that hasn’t shown up in the hard data. Sure, soft data is squealing, but it’s been crying wolf for months. Until hiring or spending breaks, Powell has every reason to sit tight, especially as the inflation tape remains just elevated enough to justify staying restrictive without looking asleep at the wheel.

Meanwhile, across the Pacific, the PBOC just went full liquidity cannon—cutting rates and flooding the system ahead of trade negotiations with the U.S. The contrast couldn’t be starker. Beijing’s trying to front-load ammo for a deal; the Fed’s letting the U.S. economy play out its resilience hand. Think of it as monetary policy poker: China just raised the stakes, but the Fed won’t blink.

Money markets have fully priced in this nothingburger, with less than 2% odds of a cut today but still 72bps of easing penciled in for the rest of the year. Traders are playing the long game, betting that by June or July, the cracks will be too obvious to ignore. Some are even sniffing out 125bps of cuts by year-end—but that path still hinges on real deterioration, not just soft sentiment.

Powell’s press conference is likely to be a masterclass in ambiguity. Expect the same song: “data-dependent,” “policy is well-positioned,” and maybe a casual nod to “elevated risks” without putting his thumb on the scale. No SEP means no dot plot drama. Just words, tone, and the ever-watchful parsing of what “modestly restrictive” really means in this cycle’s endgame.

What to watch? Tariffs. Inflation stickiness. Labor cracks. And whether financial conditions actually bite. The Fed doesn’t need to lead—right now it just needs to not get in the way.

Bottom line: this meeting won’t move the earth, but it will anchor the Fed’s posture as the patient hawk—perched, not diving. The curve might bull flatten if data cooperates post-FOMC, but don’t expect a directional breakout until CPI hits or payrolls roll over. Until then, Powell’s playing defense while the market prices in a late-summer policy pivot.