The dollar index (DXY) approached a 10-day low Tuesday amid mounting concerns about the political viability of President Trump's budget and tax-cut proposals. Ongoing Republican divisions and lingering effects from Moody's recent downgrade prompted investors to reconsider exposure to U.S. assets, pressuring the DXY towards the psychologically critical 100 level and its 21-day moving average.

EUR/USD Rises as ECB Cautious

EUR/USD advanced towards its 21-day moving average at 1.1284, supported by robust European equity markets, notably the DAX index reaching record highs. ECB policymaker Klaas Knot injected caution, however, indicating that clearer economic signals are required before a potential June rate cut decision.

Sterling Gains Before UK Inflation Data

GBP/USD strengthened, nearing Monday’s high at 1.3404 ahead of Wednesday’s pivotal U.K. CPI release. Comments from Bank of England Chief Economist Huw Pill suggested recent rate cuts might have been excessive given persistent wage pressures, limiting prospects for aggressive future easing.

USD/JPY Stays Defensive Ahead of G7

USD/JPY hovered defensively around the crucial 145 level amid notable option expiries. Market focus intensified on Japan-U.S. trade talks, with key meetings between Japanese Finance Minister Katsunobu Kato and U.S. Treasury Secretary Scott Bessent at the upcoming G7 summit.

AUD/USD Pressured by China and RBA

AUD/USD weakened after the Reserve Bank of Australia's rate cut and China's unexpected benchmark rate reduction, exacerbating concerns over Chinese economic health and dampening commodity-linked currencies.

Mixed Markets Reflect Cautious Sentiment

Treasury yields closed mixed as the 2s-10s spread widened slightly to +47.3bp. Equities softened, with the S&P 500 down 0.7%, reflecting political and economic growth anxieties. Commodity markets mirrored caution: oil declined on weak Chinese demand signals, while gold surged nearly 2% on dollar weakness and geopolitical tensions.

Market Snapshot:

• EUR/USD +0.27%; GBP/USD +0.17%
• USD/JPY -0.20%; AUD/USD -0.64%
• Gold +2%; Oil slightly lower; Copper marginally weaker