FX markets are settling down after a lively Monday. It made sense for the Japanese yen and Swiss franc to sell off the hardest as Washington policy was re-appraised. Here, the 90-day truce is very much a tick in the box of 'pragmatic' policy as opposed to ideological views that imports (especially from China) were inherently a policy failure, ING's FX analyst Chris Turner notes.

DXY may be on its way to the 102.60 area

"That said, today's April core CPI data is still expected at a sticky 0.3% month-on-month and should feed into the narrative that the Fed is in no hurry to cut rates. In fact, this month the terminal rate for the Fed's easing cycle has been repriced to 3.50% from 3.00%. Today, we'll also see April's US small business NFIB optimism index. Another drop in confidence is expected here, but this may not be a market mover in light of yesterday's US-China detente."

"As to the dollar, the view that Washington seeks to pull back from an act of self-harm has sent equity markets soaring and the US 10-year swap spread (a credit gauge for the US government) has narrowed a little. Very compelling stories for asset re-allocation away from the US and the dollar may have to be paused temporarily – at least until we see how much this uncertainty has hit the hard data."

"DXY broke through strong resistance at 100.80 yesterday (now support) and may well be on its way to the 102.60 area. However, we see this is a bear market correction rather than the start of a major dollar rally, and suspect that both the public and private sectors will want to cut their share in US allocations/raise dollar hedge ratios into any 2-3% dollar rally from current levels."