USD Tariffs: A Market Shock or Just Noise?.
USD strength today, but long-term outlook uncertain: A flat 20% tariff could drive short-term USD gains, but sustained appreciation depends on tariff duration and US data.
FX impact hinges on tariff details: A broad, uniform tariff could favor USD and JPY, while targeted duties would hit specific currencies harder.
EUR/USD downside risk, but not immediate collapse: Strong buying interest at 1.080 suggests the euro isn’t fully pricing in tariff risks—EU targeting would be key for further declines.
GBP could outperform EUR: Trump’s willingness to negotiate with the UK suggests GBP may be more resilient, with EUR/GBP likely to dip below 0.830.
Markets bracing for volatility: While today’s announcement may cause a knee-jerk reaction, the long-term impact depends on follow-up negotiations and economic data.
USD: All Eyes on the 10PM CET Tariff Announcement
The market’s reaction to today’s tariff announcement will hinge on key factors: the size of tariffs, their geographical and sectorial distribution, and whether there’s room for negotiation. The announcement is set for 4PM ET / 10PM CET.
Reports indicate that Trump may impose a 20% tariff on most US imports, potentially generating $660bn in revenue. However, a tiered system with varying rates or sector-specific exemptions is also on the table. A key uncertainty is whether these tariffs will stack on top of existing auto and metal tariffs or if the highest rate will simply replace them.
The FX impact will largely depend on how these tariffs are distributed across countries. A flat 20% tariff could push the dollar higher, but country-specific duties will drive individual currency moves. European currencies seem particularly vulnerable.
Another critical factor is whether the administration signals openness to negotiations. Treasury Secretary Scott Bessent has indicated that these tariffs may be the ceiling, leaving room for reductions. However, unlike past US-Canada-Mexico disputes, this round of tariffs appears structural and revenue-driven, making them potentially longer-lasting.
Markets have seen a sharp outperformance from AUD, NZD, NOK, and CAD, as a broad tariff is seen as less arbitrary than targeted reciprocal measures. Still, downside risks dominate, and a stronger USD and JPY could emerge from today’s announcement as traders reposition.
Despite the dollar’s likely outperformance today, its long-term strength remains uncertain. Market focus will shift to how long the tariffs stay in place and key US data releases like ADP payrolls. While we still expect USD appreciation, the road ahead will be anything but smooth.
EUR: A Tariff Risk Yet to Be Priced In?
EUR/USD has edged lower ahead of the announcement, but strong buying interest below 1.080 suggests that markets aren’t fully embracing a tariff-driven bearish euro outlook.
Our analysis suggests that EUR/USD currently has no risk premium for tariffs. If a 20% blanket tariff is confirmed, a deeper euro decline becomes more likely. However, unless the EU is explicitly targeted, the euro may hold up better than other high-beta currencies.
Beyond today, the ECB’s upcoming decision could surprise markets with a more hawkish tone, supporting EUR demand. We still expect EUR/USD to decline towards 1.070, but it won’t be a straight drop, even if the US takes a more aggressive stance.
GBP: A Relative Safe Haven?
The UK’s goods exports to the US account for just under 2% of GDP, compared to 3% for the eurozone—a small but notable difference. However, Trump has previously expressed interest in a trade deal with the UK, suggesting that British exports could be prioritized for exemptions in negotiations.
If markets sense that today’s tariffs will be watered down through talks, GBP could outperform EUR. In the near term, EUR/GBP may dip below 0.830, but a longer-term rebound is possible if Bank of England rate expectations shift lower.