Written by the Market Insights Team
Tariffs kick in, volatility is rife
George Vessey – Lead FX & Macro Strategist
The US has implemented its steepest tariffs on trade partners in over a century, with rates varying significantly across regions. The most striking development is the 104% tariff imposed on Chinese goods, signalling a major escalation in trade tensions. If these measures remain in place, they could effectively isolate the world’s two largest economies from one another. But this trade war is not just about tariffs; it reflects a broader geopolitical rivalry that could reshape global trade dynamics for years to come. Wild swings in markets continue as traders grapple with pricing the impact of a the conflict.
Hopes for market stability were short-lived yesterday. The 4% rebound in the S&P 500 evaporated to end with a loss of 1.6% – its biggest U-turn since at least 1978. The tech-heavy Nasdaq suffered its biggest blowdown since at least 1982 – falling deeper into bear market territory. The VIX fear index closed above 50 for the first time in over four years and is now almost four standard deviations above the long-term average. This marks a level of volatility most recently seen in 2020 (pandemic) and 2008 (GFC). Oil prices have also sunk to fresh 4-year lows on global growth and demand concerns.
The selloff in longer-dated Treasuries also gained momentum, with the US 10-year yield climbing above 4.5% and the 30-year yield briefly surpassing 5%. Investors appear to be stepping away from what was once considered the world’s safest asset, driven by expectations of weakening foreign demand as tariffs take hold. If the current pace of these bond moves persists, it could prompt central banks, including the Federal Reserve, to reassess their positions, even amid lingering concerns about persistent inflation pressures.
Turbulence to persist in FX
George Vessey – Lead FX & Macro Strategist
In FX, currency traders are positioning for turbulence to get even worse with hedging costs to protect against large swings surging. The dollar’s status as a post-pandemic safe haven is unravelling under the weight of President Trump’s tariffs, which risk triggering stagflation in the US economy. These measures are also undermining the narrative of US exceptionalism that has shaped the investment landscape for decades.
Meanwhile, China has set its currency at its weakest since 2007. the offshore yuan is a record lows. The safe haven Swiss franc remains the top haven of choice in the FX market. But Swiss officials will be eying this closely with rate cuts and FX intervention measures up their sleeve to rein in the currency. Antipodeans remain vulnerable – the Aussie and Kiwi dollars near multi-year lows.
While there were hints that President Trump might consider tariff deals, the path to negotiations remains fraught. Globally, investors are increasingly anxious about potential cracks in the financial system amid heightened volatility. This uncertainty has sparked speculation that the Fed may need to accelerate rate cuts to stabilize the situation.
Meanwhile, flying under the radar but still important to note – small US businesses foresee business conditions worsening ahead, a result of domestic and global policy choices. The NFIB’s small-business optimism index fell more than expected in March. A drop in business conditions and sales expectations was mostly behind the headline decline. Ultimately, uncertainty remains too high for small businesses to plan ahead.
Euro surges again
George Vessey – Lead FX & Macro Strategist
EUR/USD has shot back above $1.10 today and is now up 10% from March lows. Momentum looks to be in the euro’s favour and we wouldn’t be surprised to see $1.12 trade soon given the price action over the last few days. Options markets are sending mixed signals though, with one-week risk reversals still leaning euro-bullish, but moving sharply lower versus a week ago.
The euro’s high liquidity continues to shield it from the heightened volatility seen in high beta G10 peers. The common currency is enjoying a surge of increased flows as traders dump the dollar. The lack of stresses showing up in USD funding markets may also be a sign that investors are much less eager to pile into dollars this time round.
While the European Union has expressed readiness to negotiate tariff-free options with the US, such discussions are likely to take time. In the meantime, the EU is proceeding with measured retaliation against US tariffs, including 25% duties on various US products. A vote on such measures is expected today.
Sterling caught in the crossfire
George Vessey – Lead FX & Macro Strategist
Amidst the broad-based dollar weakness, GBP/USD is back above $1.28, bouncing of its 50-day moving average this week. However, the euro’s strength has dragged GBP/EUR to fresh 6-month lows, with the pair fighting to stay afloat the €1.16 handle.
There may be scope for a more protracted recovery in the likes of GBP/USD as investors continue to shun US assets, though we’re unsure whether it has legs to, or if the pound is attractive enough in this environment to allow the $1.32 peak of this year to trade again any time soon. Cutting through the noise, we point to rate differentials, which suggests the current $1.28-$1.29 is fair value at present. Markets are pricing in more rate cuts by the Bank of England this year – but to pick up the pace of easing the BoE would likely need to see inflation moderate below its February forecasts.
As for sterling versus the euro, the pair has dropped for four days straight – with a cumulative decline of over 3% despite rate differentials pointing to €1.19 fair value. The pair is heavily oversold on the daily relative strength index, meaning it may be unwise to chase the trend much lower from here.
Euro defiant amid trade war
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: April 7-11
All times are in BST
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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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