Sovereign International Daily Market Report
US dollar slumps as investors call Trump’s tariff bluff
The dollar has sold-off against most currencies in the past 48 hours or so, as fears over the state of the US economy outweighed any concerns over the global growth implications of Trump’s tariffs.
Highlights:
President Trump dealt markets yet another hammer blow in confirming that tariffs aimed towards Canada (25%), Mexico (25%) and China (an additional 10%) will go ahead as planned. While the timing and the size of the trade restrictions was very clearly telegraphed by the President, Trump has cried wolf before, and investors were clearly bracing for the possibility of last minute deals that would delay their implementation.
Instead of rallying, however, the dollar has actually lost ground against most currencies - even the Canadian dollar and Mexican peso have reversed practically all of their losses. Greater trade restrictions should be bullish for the greenback, but concerns over the health of the US economy, which has taken a clear turn for the worse in recent weeks, and bets in favour of a more aggressive Fed easing cycle, are weighing on the dollar.
This week will be an important test of the above narrative. February PMI figures will be very closely watched today, and Friday’s US payrolls report is shaping up to be one of the most important in recent months.
USD
We’ve seen a somewhat unexpected shift in the market’s view of US tariffs in the past 48 hours or so. The enforcement of Trump’s trade levies should be propping up the dollar, but market participants this week appear to be focusing more on the impact of these restrictions on the US economy than the global one. Indeed, markets are now bracing for a possible contraction in activity in Q1 after the closely watched Atlanta Fed GDPNow estimate, which provides a running guage of annualised US growth, fell into negative territory late-last week - partly a consequence of the Republican DOGE efforts intended to reduce waste in the US government.
We also note that the retaliatory responses from China and Canada have been relatively restrained thus far, and merely targeted to specific sectors, rather than applied holistically. Authorities appear keen to avoid an escalation in the tit for tat tariffs that would trigger a full blown trade war, and markets are perhaps clinging onto the hope that this keeps alive the possibility of fresh negotiations and a diluting of the tariffs at a later date. PMI and payrolls data will be closely watched in the coming days. Investors are betting that the Fed will need to take a more aggressive approach to cuts this year, and futures are now pricing in almost three cuts during the remainder of the year.
EUR
The euro has surged north this morning, riding the wave of the broad weakness that we’re seeing in the US dollar. News that Germany’s Chancellor-to-be Friedrich Merz had agreed a deal with his likely coalition partners to unlock an additional fiscal injection has provided additional support for the common currency. The soon to be coalition of the CDU and SPD will present a bill in parliament next week designed to soften Germany’s existing borrowing rules, namely the country’s ‘debt brake’, which would allow for greater spending on defence and around €500 billion on infrastructure over the next decade. Markets have reacted to the news in a positive fashion, sending the euro higher, while German bund yields have jumped almost 20bps this morning.
The big question now is whether or not the move upwards in the euro can be sustained. With Trump’s early-April deadline for tariffs looming large, and the European Central Bank showing no signs yet of letting up on its easing cycle, we think that a correction is in the offing. Another 25bp cut from the ECB is all but a certainty on Thursday but, as we’ve outlined in our March meeting preview report, the path beyond then is not necessarily clear cut.
GBP
Sterling has surged back above on the dollar this morning, although it has lagged behind the euro in the past few days, which has received added impetus from hopes of a fiscal injection in Germany. Revised PMI number out this morning confirmed that Britain’s economy barely grew in February. Thus far, most Bank of England officials have taken the view that rates should stay high in order to counter the risk of elevated inflationary pressures. Yet, any signs that some of the more hawkish members of the MPC are beginning to place a greater emphasis on the growth outlook would be bearish for the pound.
Senior BoE officials, including members Andrew Bailey, Huw Pill, Megan Greene and Alan Taylor, will testify at the Treasury Select Committee this afternoon. For now, we think that most officials will reinforce the view that a ‘gradual’ pace of cuts remains warranted, which would probably cement market expectations for just two more UK rate cuts during the remainder of the year.
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