Tariff Turmoil: Will New Trade Barriers Boost the Dollar?.

  • USD Poised for Gains: New tariffs, potentially applied to all trading partners, could support the dollar, though skepticism remains about their longevity due to economic risks.

  • Market Sentiment & Risks: The FX market is more focused on U.S. domestic impact than on affected countries, with risks skewed towards a stronger USD and JPY, while EUR, AUD, and NZD face pressure.

  • EUR/USD Overvaluation: Despite its recent rally, EUR/USD may be overpriced ahead of tariffs. Heavy EU-targeted tariffs could push the pair toward 1.070.

  • GBP Faces Trade Risks: The UK’s fiscal outlook remains uncertain amid welfare spending cuts. GBP/USD support around 1.2870 may hold, but tariff risks could impact UK trade prospects.

  • Diverging Market Views: While Bank of America warns of stagflation risks weighing on USD, Wells Fargo maintains that the U.S. growth advantage will keep the dollar supported.

USD: A Tariff Tailwind?

The U.S. is poised to unveil a fresh wave of tariffs on trading partners this Wednesday, an event President Trump has dubbed “Liberation Day.” Our economics team tackles ten key questions surrounding this tariff announcement in this week’s preview.

FX markets are signaling a stronger focus on the domestic impact of these tariffs rather than their effect on targeted nations. Skepticism remains over Trump’s ability to maintain tariffs long-term due to concerns about inflation and economic growth. Our perspective is slightly more cautious—while stock market turbulence or economic strain could curb protectionist efforts, if Trump’s aim is to generate revenue for budget spending, these tariffs may be more structural and enduring rather than temporary measures like those imposed on Canada and Mexico.

The dollar could find some support this week, as markets may be underestimating the impact of widespread tariffs. Trump has hinted at extending tariffs to all countries, skewing risks in favor of a stronger USD and JPY while pressuring European currencies, as well as the AUD and NZD.

U.S. economic data will also be pivotal. The greenback’s sensitivity to macro releases means any USD-positive tariff news could still be offset by weak data. Key releases include JOLTS openings and ISM manufacturing on Tuesday, ADP payrolls on Wednesday, ISM services on Thursday, and nonfarm payrolls on Friday. Our economists forecast 125k jobs added (below the 138k consensus), which should prevent any major unwinding of potential USD gains from tariffs.

With defensive positioning ahead of Wednesday’s announcement, some dollar support around 104 on the DXY index seems more likely than another downturn.

EUR: Overpriced Ahead of Tariff Shock?

EUR/USD at 1.084 just before the U.S. unveils aggressive tariffs on the EU underscores the FX market’s forward-looking nature. The pair’s rally has been fueled by optimism over EU growth prospects and pessimism about the U.S. economy—factors that haven’t yet been validated by data. Our models indicate EUR/USD is trading around 0.5% above fair value, with the 2-year swap rate gap (-155bps) too wide to justify a push to 1.09-1.10.

A sustained EUR/USD downturn requires U.S. data stabilization, but the euro also appears to be overestimating its upside. If the U.S. slaps heavy tariffs on all EU imports, EUR/USD could fall toward 1.070. EUR/JPY will also be a key barometer for tariff-related risk.

On the data front, Germany’s CPI for March is expected to slow from 2.3% to 2.2%, aligning with eurozone-wide inflation projections due tomorrow.

GBP: Holding Steady, But Risks Loom

GBP/USD found support around 1.2870 last week but struggled to breach 1.3000. The UK government announced fresh welfare spending cuts in the Spring Statement, allowing the OBR to forecast compliance with fiscal rules, with an expected £10bn budget buffer over five years. However, concerns persist that tax hikes may be required.

The OBR slashed its 2025 GDP growth forecast to 1.0%, though medium-term expectations saw a slight upgrade. Trade considerations remain crucial. HSBC warned that, as a small, open economy reliant on global and European growth, the UK won’t be immune to tariff disruptions, even if it secures lower tariff rates.

The bank dismissed the notion that tariffs are already priced into FX markets, arguing that higher tariffs could be just as damaging for the U.S. as other economies—but ultimately still favoring USD strength. HSBC maintains a year-end GBP/USD forecast of 1.23.

Market Views on USD Outlook

Bank of America highlighted risks to U.S. growth, citing concerns over spending cuts, rising deficits, and a more aggressive tariff stance than anticipated. The resulting stagflationary pressures could weigh on the dollar and threaten U.S. economic stability.

Conversely, Wells Fargo remains bullish on the dollar, arguing that despite a slowdown, U.S. economic growth will still outpace other advanced economies, maintaining a relative GDP advantage that should support USD gains.

Meanwhile, ING noted potential shifts in FX market dynamics. Traditionally, currency values align with interest rate differentials, but uncertainty around U.S. policy has markets searching for new narratives. A key question is whether global FX reserve managers, who collectively hold nearly $13 trillion in reserves, might consider reducing their dollar exposure.

*All rates shown are indicative of interbank rates and should only be used for indication purposes only. It is important to note that foreign exchange rates fluctuate and that rates may vary depending on the amount and the base currency that is purchased or sold. Rates are correct as of 8:00am UK time. CentralFX are not responsible for the rates shown.