Fed and BoE May Diverge on Inflation Fight as US Holds Rates and UK Looks to Cut

A renewed sense of optimism about a potential US-China trade deal lifted market sentiment, even as investors continued to shift funds away from U.S. funds for a third straight week. The week also saw a mixed bag of economic signs, with strong payroll data contrasting against concerns about inflation and tariff tensions, while gold and other precious metals faced a rare week of net selling after a prolonged period of inflows. Against this backdrop, traders anticipated the Federal Reserve to hold rates steady, and investors weighed the possibility of a UK rate cut in the coming months. The U.S. dollar hovered near pivotal levels, with the U.S. Dollar Index (DXY) showing signs of a potential technical breakout above the 100.00 threshold, depending on the trajectory of tariff news and macro data. This confluence of factors set the tone for a week that balanced risk-on sentiment with ongoing policy and trade uncertainties.

Week In Review: Optimism On US-China Trade Deal Leads To Improved Sentiment

Market Performance and Economic Data

Wall Street extended its gains into Friday, marking a second consecutive week of advance as equities benefited from stronger-than-expected domestic data and emerging optimism over trade discussions. The labor market delivered a particularly supportive read, with the U.S. adding 177,000 jobs in April, a figure that exceeded market expectations and helped reinforce confidence in the resilience of the labor market even amid tariff-related uncertainties. The unemployment rate held steady at 4.2%, reinforcing the narrative that the jobs engine remained intact and capable of supporting consumer spending and broader economic activity. The positive payroll figure came in the wake of a recent government release detailing a contraction in gross domestic product (GDP) for the first time in three years, a development that some commentators attributed to a surge in imports driven by tariff implementation. This juxtaposition underscored a paradox at the heart of the current macro landscape: robust labor demand and consumer activity coexist with inflationary and growth headwinds arising from trade frictions and supply chain realignments.

The market response reflected a tempered optimism. While stocks advanced, the broader macro picture suggested that investors were recalibrating expectations, balancing the possibility of a near-term policy pivot against the threat of escalating tariff volatility. The confidence in domestic economic momentum helped to offset concerns about external constraints, and the direction of travel in inflation expectations remained a critical variable for rate outlooks in the months ahead. In the background, the degree of uncertainty surrounding tariff dynamics continued to influence risk sentiment. Beijing’s openness to Washington’s tariff talks signaled a potential pathway to de-escalation, even as both sides remained wary of concessions that could undermine their strategic bargaining positions. The possibility of negotiated constraints and redesigned tariff arrangements added a degree of policy clarity that markets had sought for some time.

Trade Developments and Tariff Dynamics

Tariff headlines remained a central driver of market mood. Beijing signaled that it was considering Washington’s proposal to engage in talks about President Donald Trump’s 145% tariff on Chinese imports, a development that could—if advanced—alter the calculus around the tariff regime and its spillovers into global supply chains. The tariff dispute between the two largest economies has, for months, unsettled investors who worry about the broader macro implications, including cost pressures on consumers, the pace of corporate investment, and the risk of supply-side disruptions. The potential for a negotiated pathway toward tariff relief or reform created a window for sentiment to improve, even as traders recognized that any progress would likely be incremental and contingent on persistent diplomacy.

The evolving tariff narrative remained a focal point for market participants. The interplay between tariff threats and policy responses from central banks, especially the Federal Reserve, shaped the momentum in equities and fixed income markets. The sense that the tariff front could stabilize—whether through formal talks or partial concessions—represented a meaningful shift from the prior risk-off posture that had dominated much of the recent trading environment. Yet, investors remained mindful of the possibility that a protracted trade dispute could reassert itself, given the incentives for both sides to hold firm in the pursuit of favorable negotiating outcomes. The delicate balance between optimism and risk underscored a market environment in which headlines could rapidly alter sentiment and reposition portfolios.

Investment Flows and Sector Impacts

Despite the improving sentiment, fund flows told a more nuanced story. U.S. funds faced outflows for a third consecutive week, underscoring a cautious stance among investors who sought to rebalance risk in light of tariff uncertainty and competing macro signals. In contrast, European equity funds attracted the largest weekly inflow since mid-March 2024, with investors adding roughly $14.64 billion to European equities, signaling a rotation toward more defensive or cyclical exposures within Europe as growth and inflation dynamics unfolded. Asian funds also drew substantial inflows, amounting to about $6.68 billion, highlighting a continued interest in regional markets as growth differentials and policy paths diverged in Asia.

The divergence in fund flows reflected a broader reallocation among global asset classes. The move away from U.S. funds could be interpreted as a bid for international diversification amid a complex tariff landscape, while the strength in European and Asian markets suggested relative resilience in those regions’ earnings and macro indicators. Within asset classes, sectors linked to global growth—such as technology, industrials, and materials—saw varying degrees of momentum, sometimes outpacing traditional defensive positions as investors priced in the possibility of a softer tariff regime and steadier growth trajectories. The inflows to international equities also fed into a broader narrative of a global synchronized recovery, albeit with regional nuances that kept investors alert to idiosyncratic risks and country-specific policy shifts.

Commodities Spotlight: Gold, Silver, and Other Precious Metals

The week saw a meaningful shift in the commodities complex. Gold and other precious metals recorded their first week of net selling after a 12-week streak of inflows, with investors withdrawing a modest amount, around $4.4 million. The sell-off in gold occurred against a backdrop of improving risk appetite, as investors appeared to tolerate a degree of tariff uncertainty in exchange for the potential upside from a U.S.-China easing path. The decline in demand for precious metals suggested that market participants were seeking yield and more visible risk-on assets, moving away from traditional safe-haven holdings as confidence in a near-term resolution to the tariff dispute grew.

Gold’s price action reflected the broader demand-supply dynamics in precious metals markets. The metal had previously benefited from flight-to-quality flows during periods of heightened risk, but with sentiment turning more constructive on trade negotiations, some investors rotated out of safe-haven assets. The price trajectory around the current level captured a balance between sticky inflation concerns, expectations about the Federal Reserve’s policy path, and evolving tariff headlines. For traders and investors, gold’s price behavior remained a barometer for risk sentiment and macro uncertainty, with the potential to rebound if trade talks encounter headwinds or if inflationary pressures reassert themselves more forcefully.

In the broader precious metals spectrum, related assets such as silver and platinum also experienced reactions tied to shifts in risk sentiment and industrial demand expectations. A synchronized rotation in commodities markets—driven by changing risk appetites, geopolitical developments, and policy signals—emerged as a recurring theme. The net result was a more nuanced picture for the commodities complex, where some assets benefited from macro tailwinds while others faced headwinds linked to a perceived improvement in tariff-related risk and an accompanying preference for growth-oriented assets.

Energy Markets and Oil Price Dynamics

Oil markets moved decisively lower this week, with WTI crude prices dipping below the $60-per-barrel mark on the back of reports that Saudi Arabia and its allies were comfortable maintaining lower price levels for a longer horizon. The price action reflected a combination of supply-side signals and strategic considerations within OPEC+ as it prepared for a crucial meeting to decide production adjustments for June. Reuters reported that some members were exploring a faster pace of production increases for June, while others suggested keeping to the smaller hikes previously planned. The meeting’s timing—was moved earlier than initially scheduled—added a layer of uncertainty about the oil market’s near-term trajectory, with outcomes potentially signaling more volatility as traders priced in various production scenarios.

The broader energy narrative remained influenced by geopolitical signals and the economics of supply and demand. The potential shift in production pace by OPEC+ could weigh on prices in the near term, while any decision to tighten or loosen policy would reverberate across energy equities and related markets. The oil complex remained sensitive to news flow from the Middle East and the broader balance of spare capacity globally, as well as to the risk sentiment generated by tariff news and global growth expectations. Investors continued to monitor production quotas and the potential implications for energy inflation, consumer energy costs, and corporate energy expenditures, all of which feed into broader macroeconomic assessments.

Currencies and the U.S. Dollar

In currency markets, the U.S. dollar softened on Friday but later regained ground against the euro and the yen after the data showed stronger-than-expected payrolls, highlighting a resilient labor market. Earlier in the week, the dollar had trended higher against both currencies as traders grappled with the evolving tariff backdrop and the anticipated policy path from the Federal Reserve. The overall recovery in the dollar seemed linked to a combination of shifts in interest rate expectations and the perceived impact of tariffs on the U.S. economy, even as traders weighed the possibility of a June rate cut.

The broad dollar dynamic was characterized by a complex interplay between policy expectations and tariff developments. The market initially moved toward pricing in a more aggressive pace of rate cuts, but data revisions and improved labor market readings contributed to a recalibration—reducing the probability of near-term cuts. The futures market signaled a more tempered outlook for the June cut, with probability estimates adjusting downward after the payroll data released in April. The net effect was a dynamic currency environment in which the dollar could experience volatility around key event risk tied to tariff progress, central bank communications, and global macro data.

Federal Reserve Rate Expectations and Market Pricing

The momentum in rate-path expectations shifted notably after the payroll release. The market broadly anticipated fewer near-term rate cuts than previously priced in, narrowing the window of aggressive easing. After the job data, rate futures markets reduced expectations for a June rate cut, with the probability falling to about 35.6% from roughly 58% in the preceding session. Across the broader horizon, investors still priced in a total of about 80 basis points of rate cuts over the next year, roughly three 25-basis-point reductions, compared to earlier expectations around 100 basis points. The recalibration reflected evolving expectations about economic resilience, inflation dynamics, and the potential impact of tariff-related adjustments on growth and price pressures.

In sum, the week’s narrative painted a picture of cautious optimism. The improved sentiment around a possible US-China trade resolution provided a counterweight to tariff-driven anxieties, while the data mix suggested both resilience in the labor market and ongoing questions about the trajectory of inflation and macro growth. Asset flows indicated a preference for international exposure alongside a continued appetite for risk-on positioning in certain sectors, even as investors remained vigilant to policy guidance and headline risk. The dollar’s trajectory remained sensitive to shifts in tariff expectations and policy signals, underscoring the ongoing central role of monetary policy and trade dynamics in shaping market volatility.

The Week Ahead: Fed On Deck As Trade Deals Grow Nearer

Asia-Pacific Markets and China Trade Data

Looking ahead, the week is anticipated to be relatively quieter in Asia-Pacific trading sessions, yet not devoid of high-impact data releases and policy signals. China’s April trade data will be watched closely to gauge the impact of rising tariffs on trade flows, particularly with a potential double-digit decline in exports to the United States. Given that roughly 14-15% of China’s exports serve the U.S. market, a significant slowdown in U.S.-bound shipments in April would be a meaningful datapoint. The import side is expected to reflect a similar softness, with purchasing managers’ index readings corroborating signs of a cooling external demand environment.

Investors will also scrutinize China’s foreign exchange reserves data as the week unfolds. Analysts will be looking for signs of substantial reserve movements, including the possibility of strategic shifts in holdings of U.S. Treasuries, which could signal broader shifts in the country’s foreign exchange strategy or risk posture. While some trade between the U.S. and China may re-route toward different regions, the pace and scale of such shifts are unlikely to fully offset the lost trade, at least in the near term. The overall regional data flow will be important for global macro positioning, particularly in the technology supply chain, manufacturing, and export cycles across Asia.

Europe, UK, and the U.S. Data Calendar

In Europe and the United Kingdom, the Federal Reserve’s policy stance remains a central cross-asset driver. The Fed is expected to hold interest rates steady next week, continuing to emphasize price stability and the preparedness to maintain a cautious stance to prevent temporary price pressures from bleeding into longer-term inflation. Fed Chair Jerome Powell has repeatedly underscored the need to balance timely policy responses with the preservation of price stability, while Fed Governor Chris Waller indicated a reluctance to entertain rate cuts in May or June, highlighting that tariff-related effects would take time to feed through to data. The pause in tariffs is unlikely to influence data meaningfully until after July, keeping the focus squarely on macro indicators and the policy narrative.

The economic calendar in Europe includes the release of key data from the UK, with traders closely watching for signs that the Bank of England might implement a 25-basis-point rate cut in the near term. While tariffs are less of a direct issue within the European bloc than in some other regions, service inflation remains persistent and could influence BoE policymakers. Market participants will assess whether the BoE’s communication remains cautious, maintaining a gradual approach to any future policy easing. The European data backdrop—comprising service-sector activity, inflation readings, and consumer demand metrics—will be critical for gauging the health of the region’s economy and for cross-asset pricing.

In the United States, market participants will monitor the ISM Services Index for Monday release, which could indicate whether the services sector is contracting or expanding. A reading that dips into contraction could suggest a cooling economy and raise concerns about a potential recession, while a firm print would support the resilience thesis and potentially temper expectations for aggressive easing. The data flow across the Atlantic and in the U.S. will influence the tone of trading, as investors calibrate expectations for policy, growth, and inflation.

Monetary Policy Outlook: Fed, BoE, and Rates

The macro backdrop places the Fed, Bank of England, and other major central banks at the center of volatility and positioning. The Federal Reserve’s anticipated decision to hold rates, if confirmed, will align with the narrative of patience and data-driven policy amid tariff uncertainty. The market will interpret the central bank’s commentary as a signal of how it intends to respond to evolving growth dynamics and inflation pressures, including any transitory effects stemming from tariff adjustments. The possibility of a future rate cut remains on the horizon, though the timing is contingent on incoming data, particularly around wage growth, inflation, and the domestic economy’s resilience in the face of external shocks.

The Bank of England’s policy stance remains under scrutiny as it weighs the pace and cadence of rate reductions. A 25-basis-point cut could be on the table if service inflation continues to pose a challenge and if growth indicators soften. However, the BoE’s broader message is likely to emphasize gradualism—characterizing any cuts as modest and carefully sequenced to preserve financial stability and price discipline. The interplay between the BoE’s approach and broader European policy dynamics will be critical for FX markets and for sectoral asset allocation in global portfolios.

Treasury and FX Outlook

From a fixed-income perspective, traders will scrutinize anticipated shifts in the U.S. and global yield curves in response to policy signals and tariff news. The balance between growth expectations and inflationary pressures will shape the direction of bonds, with the potential for volatility tied to the tariff development narrative and the global growth trajectory. In currency markets, the dollar’s moves will likely reflect the evolving policy stance and the relative trajectory of inflation expectations across major economies. The euro, yen, and other major currencies may see fluctuating demand as traders reassess risk and reallocate exposure in response to new tariff information and policy updates.

Technical Signals and Chart Focus

Technical analysis will be watching the US Dollar Index as it negotiates the 100.00 psychological barrier and the broader resistance and support levels around 100.617, 101.180, and beyond. If the DXY closes above 100.00 with a convincing momentum profile, it could signal a renewed upside in the dollar, supported by continued tariff news risk and cautious Fed commentary. Conversely, a pullback could attract buyers at the immediate support near 99.57 or the 99.00 handle, potentially drawing strength from a softer tariff signal or more dovish policy expectations. The week’s price action in oil, gold, and equity markets will be instrumental in shaping the near-term technical landscape, as risk-on sentiment could lift equities while lifting yields and applying pressure on the dollar in certain scenarios.

In summary, the coming week is set to feature a blend of influential data prints, central bank communications, and tariff dynamics that will shape short- to medium-term market expectations. The policy backdrop remains the dominant driver of risk sentiment, with the trade talks between the United States and China providing a crucial backdrop for global growth projections and inflation trajectories. Market participants will need to monitor how tariff signals, economic data, and policy guidance interact to drive volatility and determine asset allocation across equities, fixed income, commodities, and currencies.

Asia-Pacific Markets, Europe, and US Outlook: A Cross-Asset Perspective

The interplay between regional data flows and policy expectations will define the cross-asset landscape in the week ahead. Asia-Pacific markets may exhibit early volatility as traders digest China’s trade figures, while European markets could show resilience if inflation remains contained and growth indicators stabilize. The U.S. market’s reaction will hinge on the strength of the payroll numbers, the ISM services reading, and the Federal Reserve’s communications about the pace and trajectory of future rate moves. A softer data surprise in the U.S. could reignite expectations for a rate cut later in the year, while stronger data could reinforce the case for a measured policy stance and a delayed easing path. Across regions, investors will be evaluating the balance of risks and opportunities, seeking to identify sectors and geographies with favorable exposure to sustained domestic demand and potential improvements in trade relations.

Chart and Technical Spotlight: US Dollar Index And Market Signals

The Dollar Index And Key Levels

The focus this week remains on the US Dollar Index, which is positioned to challenge the 100.00 level on a closing basis, representing a potential technical milestone with broader implications for risk sentiment and asset pricing. A daily close above this psychological barrier would be interpreted by many traders as a sign of renewed dollar strength, particularly if supported by continued tariff optimism and a favorable shift in policy expectations. The intraday dynamics around 100.00, including any Morning Star formations or other reversal patterns on the charts, will be closely scrutinized for signs of a durable breakout or a temporary spike that could reverse as data evolve.

If the bullish momentum persists, initial resistance levels to watch include 100.617, followed by a more meaningful target at 101.180. Beyond these, the market may turn its attention to the 102.16 handle, and the possibility of a renewed downward price action cannot be ruled out if the price breaches the lower support zones. On the downside, immediate support sits around 99.57, with a psychological fallback near 99.00. A break below these levels could bring the recently observed lows into focus near 97.90, raising questions about potential shifts in risk sentiment and the path of the broader macro narrative.

Chart Patterns and Market Sentiment

From a chart-reading perspective, the formation of a Morning Star candlestick pattern on the weekly chart offers a possible bullish reversal signal, suggesting that, all else equal, the market could see upside momentum if tariff progress remains favorable and if the data supports continued growth without significantly higher inflation. The risk-to-reward equation will become clearer as the week unfolds and more data points emerge. Traders will be comparing the dollar’s trajectory with movements in gold, oil, and equities to gauge whether risk appetite remains robust or begins to perish amid possible policy shifts or headlines related to tariffs. The interplay between currency dynamics and commodity prices often provides important clues about the underlying health of the global macro system, and this week’s signals will be watched for corroboration or contradiction across asset classes.

Practical Takeaways For Investors

For investors, the key actionable implications center on hedging strategies and tactical allocations. If the dollar breaks decisively above 100.00, portfolios may consider adjusting exposure toward dollar-denominated assets or hedging architectures that protect against sudden shifts in exchange rates and inflation expectations. Conversely, if price action reveals a failure to sustain above 100.00 and dips toward the 99.00–99.57 zone, traders might seek opportunities to re-enter long dollar positions or consider hedges against a potential softening in demand, particularly if tariff optimism wanes. Across other markets, a continuation of risk-on sentiment could favor equities, especially sectors with earnings resilience and export-oriented exposure, while a mixed environment could push investors toward balanced or diversified allocations that incorporate cash-like instruments or short-duration fixed income to manage risk.

Market Implications: Policy, Trade, And Global Growth

The macro narrative underscores the central role of policy and trade dynamics in shaping global financial markets. The potential for tariff negotiations to advance or stall remains a dominant force, capable of altering cross-border investment flows, corporate planning, and consumer pricing. The Federal Reserve’s stance on policy normalization, which appears to prioritize price stability and cautious accommodation, will influence interest rate trajectories and capital allocation decisions. At the same time, the Bank of England’s policy outlook and potential rate adjustments will affect European and global financial conditions, including currency valuations and the relative attractiveness of international investments.

As markets await fresh data and policy updates, investors are likely to employ a mix of strategies designed to balance growth exposure with inflation risk and geopolitical uncertainty. This approach includes evaluating sector exposures that benefit from a more favorable global growth environment, as well as considering hedged or diversified exposure to shield portfolios from abrupt shifts in tariffs or policy missteps. The week’s evolving dynamic will require careful attention to the details of tariff talk progress, the direction of wage growth and inflation, and the broader trajectory of global demand. In this environment, risk management remains paramount, and investors may favor assets with clear fundamentals, liquidity, and resilient cash flows.

Conclusion

The week underscored how intertwined trade policy, macro data, and central bank expectations are in driving market sentiment and asset pricing. Optimism around possible US-China tariff talks provided a constructive backdrop for equities and sentiment, even as fund flows suggested a cautious stance among investors. The labor market showed strength, even as broader growth data questioned the pace of expansion, highlighting the complex mix of resilience and vulnerability within the economy. Commodities, particularly gold, faced a rare pause in inflows, signaling a nuanced shift in risk appetite and a rebalancing of portfolios toward growth assets amid tariff optimism. Oil prices remained sensitive to OPEC+ discussions and supply management signals, with the potential for volatility as the group weighs production adjustments for June.

On the currency front, the U.S. dollar exhibited a delicate balance between the tailwinds of tariff developments and the winds of policy expectations that could alter the timing of rate cuts. The dollar’s technical posture near critical levels added to the market’s attention, as traders weighed the possibility of a breakout above 100.00 against the risk of retracement if data and headlines turn less favorable. Looking ahead, the market will continue to scrutinize data on jobs, services activity, inflation, and the tariff track, while watching policy commentary from the Federal Reserve and other major central banks for guidance on the path of monetary policy.

Ultimately, the coming week promises to be another dynamic period for global markets, with the trajectory of US-China trade talks acting as a central pivot. The balance of risk and reward will hinge on how quickly tariff negotiations progress, how data evolve, and how central banks respond to the evolving growth and inflation landscape. Investors should maintain a disciplined approach, staying attuned to headline risk while focusing on fundamentals, diversification, and risk management to navigate what looks to be a period of meaningful but uncertain market flux. The calendar is dense with high-impact data releases and policy communications, so market participants should prepare for potential volatility, adapting their strategies to the evolving risk-reward calculus in this pivotal moment for the global economy.