On Wednesday, the U.S. dollar index saw an upward move, bolstered by end-of-month portfolio rebalancing flows and a market that chose to look past disappointing U.S. economic data in favor of geopolitical and trade-related optimism. As the month drew to a close, traders reassessed the implications of softer-than-expected domestic figures and weighed them against shifting global narratives—ranging from potential trade deals to persistent geopolitical tensions.

Dollar Strength Amid Weak Data

Despite a slew of mixed data, the dollar managed to edge higher. The first-quarter GDP report revealed a 0.3% contraction, which under normal circumstances might rattle markets. Yet, beneath the surface, more resilient indicators emerged. Final sales to domestic purchasers grew, signaling that domestic demand remains intact. Wage growth also posted a positive print, providing a degree of reassurance about the labor market’s underlying strength.

Meanwhile, the core PCE price index—the Federal Reserve’s preferred inflation gauge—was unchanged for March. This flat reading further fueled speculation that inflation may be cooling, reducing pressure on the Fed to act aggressively on interest rates. However, the ADP employment report cast a shadow, showing private payrolls rising by only 62,000 in April, well below expectations and indicating potential softness in hiring momentum.

Still, despite this weaker-than-expected jobs data, the dollar remained resilient, partly due to falling Treasury yields, especially in the 2-year segment. These yields slipped as oil prices tumbled more than 3%, dragging inflation expectations down with them.

Yield Curve Movement and Market Repricing

Treasury yields presented a mixed picture on Wednesday. The curve steepened slightly, with the 2s-10s spread widening by about 4 basis points to +51.3 basis points. This modest steepening suggests that while short-term interest rate expectations might be softening, long-term growth and inflation outlooks remain more stable.

Traders appeared to be recalibrating their positions ahead of critical data releases scheduled for Thursday, including the ISM manufacturing index and weekly jobless claims. These numbers could further clarify whether recent economic weakness is a blip or part of a broader trend.

Trade Policy Takes Center Stage

Trade policy developments also shaped market sentiment. U.S. President Donald Trump signaled openness to a future deal with China, emphasizing the importance of intellectual property protections in any agreement. His remarks, coupled with ongoing dialogues involving Canadian Prime Minister Mark Carney and Mexican President Claudia Sheinbaum, suggest an evolving framework around North American trade dynamics. Sheinbaum, in particular, noted that recent U.S. executive orders easing tariffs on car makers marked a step forward in regional cooperation.

At the same time, geopolitical risk added a subtle tailwind to the dollar. Tensions between India and Pakistan remain elevated, and investors often view the dollar as a safe haven in times of international uncertainty.

China Responds with Policy Assurances

In Asia, Chinese President Xi Jinping reassured markets that the government would act decisively to stabilize the economy. He outlined plans to support employment, stabilize companies, and ensure confidence in markets. These comments aimed to cushion the blow from recent data indicating softness in China’s industrial and commodity sectors.

Commodity markets were particularly reactive to these developments. Oil prices plunged on reports that Saudi Arabia could tolerate lower prices, leading to broad weakness across the energy complex. Gold slipped 0.40%, while copper dropped over 5%, further underscoring market concerns about waning global demand, particularly from China.

Mixed Bag in FX and Equities

In currency markets, the dollar’s strength was most pronounced against the euro and the pound. EUR/USD fell after the soft U.S. data reinforced risk-off flows. Though the eurozone economy grew faster than expected in Q1, inflation declined and German unemployment hit a decade high—offsetting the positive GDP surprise. EUR/USD continues to hover just above the 1.12 level, though technical indicators like a potential head and shoulders pattern suggest a cautious outlook for euro bulls.

GBP/USD also declined, driven by month-end profit-taking and lower gilt yields after a reported drop in UK house prices. The pair dipped below its 10-day moving average, hinting at weakening momentum despite recent bullish attempts.

In contrast, USD/JPY traded steadily within its recent range ahead of Thursday’s Bank of Japan meeting, with implied volatility elevated. The Australian dollar was a notable outperformer, bucking the broader trend despite commodity weakness. A stronger-than-expected CPI print and strengthening Asian currencies helped AUD/USD gain ground.

Equities and Commodities Follow Suit

U.S. equities declined modestly, with the S&P 500 falling 0.71%. Investors appeared to be in a holding pattern, awaiting clarity from upcoming economic releases. Commodity-linked sectors were particularly weak, following the sharp pullback in crude and base metals.

Here’s how major FX pairs and indexes moved heading into the close:

• EUR/USD: -0.30%
• USD/JPY: +0.30%
• GBP/USD: -0.47%
• AUD/USD: +0.34%
• DXY (Dollar Index): +0.22%
• EUR/JPY: -0.07%
• GBP/JPY: -0.20%
• AUD/JPY: +0.64%

Markets are now positioning for Thursday’s ISM and jobless claims data, both of which could redefine the short-term path for U.S. interest rates and the dollar. With central bank decisions looming in Japan and macro risks still elevated, investors are likely to remain on edge, balancing fragile economic data with resilient currency flows and shifting geopolitical tides.