USD: Inflation and 10-year auction in focus today - ING

This week hasn't shown a clear direction for the dollar so far. Uncertainty around how far-reaching the US-China trade talks in London will be has left room for domestic factors to shape relative performance across G10 currencies. As of this morning, reports claim negotiators have agreed on a 'framework' to restart the flow of sensitive goods, including rare earths, pending sign-off from Trump and Xi. From a market sentiment standpoint, this feels like a positive step toward de-escalation, but not a major breakthrough. China's refusal to commit to reducing its trade deficit still leaves plenty of ammo for trade hawks in Washington to resist any structural easing, ING's FX analyst Francesco Pesole notes.

Bearish bias for the time being

"Markets are treating the London summit with some scepticism. The dollar remains one of the best gauges of trade sentiment. While it has held up generally well early this week, it hasn't built on the late-week momentum following the US-China meeting announcement. According to our short-term model, it's still about 3-4% undervalued against major G10 peers. US equity futures point to a soft open this morning following modest gains yesterday."

"Domestic fiscal developments have also weighed on the dollar. A soft 3-year Treasury auction reversed some recent gains in US government bonds, which now face a dual test today with the highly watched 10-year auction and CPI data. We expect May's core inflation to come in at 0.2%, below the 0.3% consensus, which could ease pressure on Treasuries but might weigh on the dollar as chances of a September rate cut (now 50% priced in) fade. Later today, May's Federal budget balance data will also be released."

"Our bias is bearish on the dollar today - not just because of our core CPI call, but also amid reports that Treasury Secretary Scott Bessent is being considered as Powell's Fed successor. The dollar strongly dislikes any threats to Fed independence. Add in that Bessent is likely to favour much lower rates (echoing Trump's rhetoric), and the greenback faces mostly downside risks from this story."