After three consecutive days of declines, the US dollar finally recorded a modest recovery on Tuesday.
This follows renewed hope for trade talks between Washington and Beijing, which are set to take place face-to-face this weekend in Switzerland, the first since the Trump administration's massive tariff hike last month.
While the diplomatic developments are seen as a step towards easing tensions, MARKETS warns traders not to confuse temporary relief with a real solution.
The talks are expected to focus more on 'de-escalation' efforts rather than a comprehensive restructuring of trade policy.
Tariff War Still Rages
President Trump's move to impose tariffs of up to 145% on Chinese imports, followed by a tough response from Beijing with a levy of up to 125% on US goods, has shaken global markets and triggered a wave of risk-on assets.
Now, with the return of negotiations, the market has gained some ‘breathing space’, but long-term stability still depends on whether both sides are willing to make meaningful compromises, something that remains unclear.
US Treasury Secretary Scott Bessent also acknowledged that the current level of tariffs is unsustainable for the economy. He hopes that the meeting can pave the way for a more orderly reduction in tensions.
However, Trump has recently signaled that he prefers to set trade terms unilaterally, without having to follow the conventional negotiating framework.
This uncertainty adds another layer of policy risk that traders need to consider before opening positions or increasing investment exposure.
EU Also Ready to ‘Retaliate’ with Tariffs
Meanwhile, trade tensions are also escalating in Europe. The European Union (EU) is currently drafting a retaliation package targeting around €100 billion of US exports, should the current talks with Washington reach an impasse.
According to sources close to the matter, the proposed countermeasures will be presented to member states as early as Wednesday, with a month of discussions before any action is taken.
The possibility of a transatlantic trade conflict has added to global macroeconomic uncertainty, and could weigh on risk appetite and the outlook for key central banks' interest rate policies.
South Asia Heats Up Again: India-Pakistan Strike Back
In South Asia, geopolitical tensions have spiked again after India launched a targeted military strike on Pakistan, which responded in kind. The incident follows a deadly militant attack in Kashmir last month.
While regional markets have so far been contained, any further escalation could trigger a flight to safety, with investors fleeing their funds to safe havens such as gold and the Japanese yen.
Focus Now on Fed Decision
The world's eyes are now on the US Federal Reserve's (Fed) interest rate decision due tonight. This is a key moment amid heightened trade tensions and geopolitical uncertainty.
The market generally expects the Fed to maintain its current rate, taking a ‘wait and see’ approach. However, political pressure is mounting, as President Trump continues to call for further rate cuts despite not having full support from the Fed’s own policymakers.
So far, the Fed appears to be cautious and reluctant to take drastic action early. It wants to assess the true impact of last month’s trade disruptions on the economy. The latest economic data shows a mixed picture, with service sector activity still strong, but manufacturing is slowing.
MARKETS expects the Fed to issue a cautious and neutral statement, with a dovish tone only emerging if there are more significant signs of economic weakness.
Strategy for Traders
US-China talks may provide some relief to market sentiment, but the real path to a solution remains unclear. Especially with the threat of tariffs from the EU and escalating geopolitical tensions, this is not the time to be overly confident.
MARKETS advises investors and traders to:
✅ Review existing risk exposures ahead of the Fed decision,✅ Practice disciplined risk management,✅ Prepare for renewed volatility in currency, commodity and interest rate markets.
Conclusion:
In this uncertain market situation, it is better to be safe than sorry. Opportunities are always there, but being smart and waiting for the right time will give an advantage to those who are patient, strategic and not in a hurry.
