Market Mondays: Markets Buoyed by Trade Optimism, But Fed Caution Lingers

Equities have rallied, the US dollar is staging a modest comeback, and oil prices are stabilising, all amid hopes that diplomacy will prevail over protectionism. Still, the Federal Reserve’s cautious tone last week served as a reminder that uncertainties remain—particularly around tariffs, inflation, and the Fed’s reaction function.

Here’s a breakdown of the key themes moving markets this week.

Powell Stays Cautious Amid Inflation and Tariff Risks

The major event last week was the FOMC decision, which left interest rates unchanged. Fed Chair Jerome Powell struck a deliberately cautious tone, emphasising that the central bank has “time” to assess the full impact of current economic developments. He refused to commit to rate cuts, even as markets continue to price in as many as three by year-end.

While inflation pressures appear to be moderating—evidenced by a benign PCE print—the Fed remains concerned that tariffs could introduce a fresh price shock. At the same time, the economy is still holding up reasonably well: labour markets are steady, and job creation remains positive. GDP growth disappointed in Q1, but much of the weakness was attributed to distortions from net exports and pre-tariff inventory adjustments.

The Fed’s summary of economic projections, due next month, will be critical. Markets will look to see if officials begin shifting their outlook to reflect growing downside risks—or if they double down on inflation vigilance, potentially delaying cuts.

US-China Trade Hopes Drive Market Sentiment

The dominant theme in markets remains global trade. While a deal with the UK was finalised last week, all eyes are on the US-China negotiations taking place in Switzerland. So far, the tone has been constructive, with both sides pointing to “significant progress.” A joint statement is expected imminently and could outline a framework for continued negotiations or selective tariff rollbacks—possibly even on key goods like semiconductors and fentanyl-related products.

Markets are trading as though the worst-case tariff scenario will be avoided. Equities are rallying on this belief: the S&P 500 and Nasdaq are breaking above their 200-day moving averages, signalling technical strength. However, questions remain over how much bad news has already been priced into markets. If trade talks falter or produce underwhelming substance, optimism could quickly unwind.

^{(Source: Trading View)}
(Past performance is not a reliable indicator of future results)

Dollar Stabilises, Gold Pulls Back, Crude Rallies

The US dollar continues to recover from its recent lows as markets reassess Fed policy expectations. Despite Powell’s cautiousness, signs of persistent inflation could delay cuts, providing support for the greenback. Still, the dollar’s path remains heavily dependent on both the Fed’s stance and developments in global trade.

Gold, meanwhile, has started to retrace from recent highs. While the long-term structural case for gold remains intact—driven by de-dollarisation, central bank demand, and broader geopolitical uncertainty—short-term price action has turned negative. A sustained rally in risk assets and stronger dollar could push gold toward key support at $3,000.

^{(Source: Trading View)}
(Past performance is not a reliable indicator of future results)

Oil markets have also stabilised following a recent selloff triggered by OPEC’s surprise production increase. Optimism around global growth—particularly the potential for improved trade flows—is lifting demand expectations. West Texas Intermediate is back above $62 per barrel, with technical levels at $64 now in focus.

Key Data to Watch

• US CPI (Wednesday) – Markets expect a modest uptick in headline inflation
• US Retail Sales – Could show signs of demand softness due to tariff-related price increases
• UK Jobs Data (Tuesday) – Unemployment expected to tick up to 4.5%, average earnings to ease
• UK Q1 GDP (Thursday) – Forecast at 0.6%, up from Q4 2024
• Australian Labour Market and Wage Data – May greenlight a rate cut from the RBA