And when former President Donald Trump showed up on the scene, sanctions and tariff threats at the ready. He’s looking to negotiate a truce with Russian President Vladimir Putin, during an unprecedented week of diplomatic break and ominous economic warning signs. Amid this uncertain geopolitical backdrop, traders are on a defensive footing. For now, they are doing quite the tight-rope dance with the FX market ups and downs.
Trump’s mission is clear: he aims to leverage economic pressure to persuade Putin to reach some form of agreement. Analysts say the success of this massive undertaking rests on a few critical factors. This is why upcoming economic reports have the potential to shake up market perceptions. Month-over-month, experts are estimating that the core CPI will increase by 0.3%. At the same time, consensus is expecting core CPI to come in around 0.4%. In an environment of macro uncertainty, a surprise CPI beat would have outsized effects on the EUR/USD currency pair. It may even drag the SGDNEER down to the 1.1550 level.
Participants in the market have their eyes fixed on these events. No wonder that the EUR/USD direction these days is determined much more by Washington than by Moscow. Traders are beginning to see everyday geopolitical risks in a different light. Rather than considering the current crisis in Ukraine and similar situations as existential threats, they have come to see them as a geopolitical premium.
This has been Trump’s fourth attempt at diplomacy. According to conflicting reports, Putin is winning on the battlefield with just this past week, the war tipped further in his favor. The first, of course, is that the Russian leader is under extraordinary pressure himself. Energy revenues have taken a critical hit, down 20% year on year, leading to serious inquiries about Russia’s long-term economic survival under sustained international fire. Analysts warn that Putin has a huge “war chest of patience.” This allows him to stall negotiations for weeks on end without making concessions during that time.
The dollar would strengthen in the short-term from a positive shock to market sentiment. Such a shift might allow it to “puff its chest” for a session or two. This boost may prove fleeting. That narrative is about to change, with the release of important economic barometers like the Producer Price Index (PPI), retail sales data, and National Federation of Independent Business (NFIB) survey. Look for a lot of talk about “pansy jobs and soft prejudice.” Combined, these reports would trigger lively debates over the direction of the Federal Reserve’s next easing cycle. One area where investors will be sure to turn their attention in future sessions.
Looking forward, traders are looking towards the next waypoint for EUR/USD— forecasted at 1.180 or better. Energy markets are rapidly losing their former dominance over foreign exchange flows. This change reflects the continued evolution of how traders are responding to and digesting geopolitical news in conjunction with economic fundamentals. Whether it’s economic sanctions, tariffs on imports, or just general political maneuvering between Trump and Putin, the fallout is complex and deep—in currency markets, especially.