Dollar rallies on US and UK trade deal
USD: News of the first post-Liberation Day trade deal was greeted positively by markets and the dollar on Thursday, which advanced by almost 1% on the euro. As mentioned, the main takeaway from the deal is that the 10% baseline tariff rate will remain in place, despite concessions in a handful of sectors, which may be a sign of things to come. While this raises a few concerns as to how far Trump is willing to go to de-escalate the wider tariff war, market participants just seem pleased at the sign of progress, and relieved that the White House appears willing to offer some degree of flexibility around the tariffs.
Wednesday’s FOMC announcement can also be viewed as hawkish. The vote on rates was unanimous in favour of no change. Powell appeared upbeat on the economy, which he again described as ‘solid’, while he brushed aside the Q1 GDP contraction, which he attributed to nothing more than an “unusual swing” in trade. He warned that US inflation and unemployment could be higher under the tariffs, but he also stressed that there was no need for the Fed to be in a hurry to lower rates. These remarks all but confirm a pause at the June meeting, and with the tariffs set to keep US inflation higher for longer, we see a risk that Trump’s policies put pay to anything but gradual cuts during the rest of the year - the exact thing that the President has stringently lobbied against.
Author
Matthew Ryan, CFA
Ebury
Matthew is Global Head of Market Strategy at FX specialist Ebury, where he has been part of the strategy team since 2014. He provides fundamental FX analysis for a wide range of G10 and emerging market currencies.
