Written by the Market Insights Team
The sharp global market selloff underscores investor skepticism about any beneficiaries emerging from the latest and largest escalation in the trade war. It also signals growing concerns that the US could be among the hardest-hit by Trump’s protectionist measures. US equities are set to open the day over 3% lower and the US dollar is already 1% lower against a basket of currencies – heading for one of its worst days of the year.
Trump opts for shock therapy
George Vessey – Lead FX & Macro Strategist
The Trump administration has unleashed aggressive tariff measures in both scale and breadth that go far beyond his first-term levies. They hit everyone – friend and foe. As well as the 10% tariff across the board, he’s overlayed that with additional tariffs on a wide group of countries that the US views as already implicitly placing tariffs on US exports. The market reaction has been ugly. Nasdaq 100 futures are down by about 4%, and S&P 500 futures by nearly 3%. In a classic flight to safety, Gold rose to new all-time highs and yields fell on Treasuries of all maturities, weakening the US dollar to 6-month lows.
Trump has implemented 10% blanket tariffs on all imports, starting April 5, extending them further for China (54%), the EU (20%), Japan (24) and UK (10%), with charges largely based on trade surpluses with the US. He also signaled upcoming duties on pharmaceutical drugs, semiconductor chips, lumber, and copper. Combined with prior import taxes on autos and goods from Canada, Mexico, and China, these measures will raise the average US tariff rate to 23%—a dramatic increase from 2.3% in 2024. This is the highest average US tariff rate in more than a century, and surpasses the infamous 1930 Smoot-Hawley tariffs, which arguably worsened the Great Depression.
This is a major shock to the world economy and close to the worst-case scenario Trump had threatened on his campaign trail. It will prompt retaliatory measures from trading partners and although there may be room for negotiation, high tariffs and lingering uncertainty raise recession risks. Tariffs will boost inflation in the short-term, weighing on real disposable income and cutting into spending; financial market conditions will likely tighten and the risk of equity price declines could hit consumer spending via the wealth effect; and trade policy uncertainty will remain elevated, which is suffocating for business investment.
As for the US dollar, well – so far its safe haven status has not cushioned the blow. Investors are focussed more on US stagflation and recession fears. USD/JPY is down 1.4% today, and EUR/USD up almost 1% – dragging the US dollar index to its lowest level since before the election last year.
Euro enthused by Europe’s vow to retaliate
George Vessey – Lead FX & Macro Strategist
As well as falling Treasury yields weighing on the US dollar, EUR/USD is being supported by the proactive approach of EU leaders to US tariffs. The EU is preparing a package of crisis measures to guard its economy from Trump tariffs. EUR/USD has jumped beyond $1.09 this morning, matching its highest level in the post-election period.
European currencies, including the euro, are still viewed as vulnerable, because Trump has been so vocal about growing hostility towards the EU. This may result in smaller trade negotiation room for the bloc, which clouds the growth outlook. However, pre-tariff-announcement euro strength materialized following reports of EU Commission plans for economic support measures. Moreover, in the medium term, we also think that Germany’s fiscal policy stimulus should provide a positive offset and help Europe to weather the tariffs storm, while the ECB is likely to take time to construct its policy response and is unlikely to cut rates this month as it works out the implications of the levies on not only growth but also inflation.
This could be why FX options traders are still more optimistic on the euro’s outlook further down the line. So-called risk reversals, a closely watched barometer of positioning, show investors are the most bullish on the euro over the next month since late 2020. The repricing in sentiment is also evident over the longer term. While one-year risk reversals still suggest the euro will be weaker in 12 months, that gauge jumped in March by the second most on record, and has extended higher today – a sign of the speed at which traders are turning more positive on the currency.
A Brexit dividend at last
George Vessey – Lead FX & Macro Strategist
As we’ve been highlighting for several weeks, the pound continues to act as a safe haven tariff play. Along with broader markets, sterling was volatile during Trump’s announcement. It did briefly turn lower when it was confirmed UK imports would receive a 10% tariff. But the reality is that 10% is far more lenient than what other nations are facing, and this has helped send GBP/USD soaring to $1.31 this morning – it’s highest level since October last year.
We also mentioned yesterday that GBP/USD has consolidated around the $1.29 handle for the past four weeks, with no reversal signal identified on the charts and as long as the pair held above the 200-day moving average – the path of least resistance should remain to the topside. The technical and fundamental analysis was correct. It is not just sterling strength though, it is US dollar weakness – hence the mixed performance of other GBP crosses whilst the USD is lower across the board. This is understandable because ultimately, US consumers and businesses shoulder the higher import costs – and US recession risks have shot up, dragging US yields lower.
Since Britain had a broadly balanced trade relationship with the US, it did not deserve to be punished with reciprocal tariffs. UK PM Starmer will now continue to negotiate a UK-US trade deal which he hopes will ultimately cut the US tariff on British exports. But there is already relief given the 10% tariff is the lowest rate imposed by the US president – half the EU’s 20% rate – a bonus for leaving the EU. This is why sterling could continue to trade more like a relative haven in this global trade war.
GBP/USD jumps to 6-month high
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: March 31- April 4
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
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