Softer inflation data revives Fed rate cut hopes while Trump’s new China pact sparks market relief and tariff clarity
NEW YORK, June 11 – The U.S. dollar weakened against most major currencies on Tuesday after fresh data revealed that core inflation in May rose less than expected, renewing market hopes that the Federal Reserve may begin cutting interest rates sooner than anticipated.
The greenback initially slid following the release of the core consumer price index (CPI), which showed a modest 0.1% gain for May compared to a 0.2% increase in April. Analysts interpreted this as a sign that inflation remains relatively contained, giving the Fed breathing room to pivot from its current stance.
However, the dollar trimmed some of its losses following a surprise announcement from President Donald Trump that a new trade agreement with China had been finalized. Under the deal, Beijing will increase the export of rare earth minerals and magnets to the U.S., while the U.S. will permit Chinese students to enroll in American colleges and universities.
A White House official elaborated that the U.S. will impose a 55% total tariff on Chinese imports: a 10% baseline “reciprocal” tariff, an additional 20% penalty targeting fentanyl-related trafficking, and 25% accounting for legacy tariffs. In response, China will apply a flat 10% tariff on U.S. imports.
Market Reaction and Fed Outlook
Following the CPI release, investors recalibrated their expectations for monetary policy. Traders in short-term interest rate futures now see a 68% probability of a 25-basis-point rate cut by the Fed in September, up from 57% before the inflation report.
“Inflation in May was lower than anticipated, suggesting the tariffs aren’t having a large immediate impact because companies have been using existing inventories or slowly adjusting prices due to uncertain demand,” said Alexandra Wilson-Elizondo, global co-chief investment officer of multi-asset solutions at Goldman Sachs Asset Management. “If inflation stays under control or the job market weakens, the Federal Reserve will likely consider cutting interest rates down the road.”
While the Fed is expected to hold rates steady at its meeting next week, economists now widely anticipate a dovish tone and the possibility of a rate cut later in the year.
Currency Movements
In midmorning trading, the dollar remained flat against the yen at 144.91 after initially weakening, while the euro advanced 0.3% to $1.1461, although it later gave back some gains as sentiment surrounding the dollar steadied.
Trade Deal Eases Market Tensions
Markets welcomed news of the U.S.-China agreement, which some analysts see as a de-escalation after years of rising trade tensions.
“The worst-case scenario is probably behind us. There’s a little bit of face-saving for both sides,” said John Praveen, managing director at Paleo Leon investment firm in Princeton. “From the U.S. point of view, the rare earth thing was a big deal. The question now is whether the agreement will be implemented. But the fact that they have something in place is at least a relief for the market.”