Forex alert: Cease fire talks vs tariffs – A tug of war amid a weakening US economy

Forex markets

FX volatility remains trapped near two-month lows, with traders tiptoeing around geopolitical landmines. On one side, the looming tariff wrecking ball threatens to smash global trade flows. On the other, whispers of a potential Ukraine ceasefire have not left the narrative —yet this FX market isn’t exactly brimming with conviction. Tariff uncertainty looms larger than life unless Trump throws a last-minute curveball and grants a reprieve.

Today's kicker? Zelenskyy might finally sign the mineral deal. Yep, the same one he dodged three times, leaving a trail of frustrated U.S. officials in his wake. The big question now: Is Team Trump still willing to play ball, or will they shift the goalposts yet again? If the ink finally meets the paper, a ceasefire could be knocking on Eastern Europe’s door faster than traders can unwind their risk hedges.

But here’s the wildcard—markets are rarely that straightforward. If peace talks gain traction again, expect the usual buy-the-rumor, sell-the-fact shuffle. On the other hand, if the deal gets shelved again, risk sentiment could take another hit, and the dollar could catch another fear bid. Either way, traders better buckle up—because this geopolitical rollercoaster is far from over.

The tug-of-war between Trump’s tariff blitz and a potential Ukraine ceasefire is unfolding against a backdrop of U.S. economic turbulence, and markets are starting to take notice. The once unstoppable American consumer and seemingly bulletproof economy are now losing altitude, bracing for what could be a rougher landing than anticipated. This week’s data reinforced that reality—Washington’s policy reversals, federal spending freezes, corporate layoffs, and an increasingly chaotic trade war landscape are rapidly sapping consumer confidence, chilling business investment, and rattling homebuilder sentiment.

So far, the fallout has been largely contained to soft sentiment indicators, with business and consumer surveys plunging into negative territory. But now, even the hard data is flashing warning signs—housing, industrial production, labor markets, and retail sales have all noticeably weakened, igniting a debate over just how much runway the U.S. economy really has left.

FX traders are starting to connect the dots, and long JPY positions( straight up and on the cross) are beginning to look like a decent bet—especially given the yield curve’s flashing warning signs.( USD/JPY has fallen 100 points today, top to bottom) U.S. 10-year yields remain under pressure, suggesting that traders see this as a looming growth concern rather than an inflationary impulse, more so with the US economy looking vulnerable. U.S. 10-year yields are under pressure, signalling that bond markets are leaning into recession fears rather than inflation concerns. If the U.S. consumer finally buckles, risk sentiment could unravel in a hurry, pushing the Fed to cut rates sooner than expected.

And just to keep things interesting, Trump’s tariff wrecking ball isn’t just smashing into Canada, Mexico, and China—it’s now barreling straight at Europe. And then there’s the wild rumour swirling around trading desks—that some of Zelenskyy’s ultra-left EU and U.S. backers encouraged him to walk away from the mineral deal with Trump. If that conspiracy theory has even a shred of truth, the latest 25% across-the-board tariff on EU imports might just be an appetizer for what's coming next.

Brussels should have seen this coming—Trump has long viewed Europe’s VAT system as an implicit trade tariff. With VATs averaging 21% across the EU and the bloc running a $236 billion trade surplus against the U.S. in 2024 (second only to China’s $295 billion), European exporters are now scrambling for cover.

So, what’s next? Is Trump bluffing, or is this the beginning of a full-blown trade war escalation? Predicting that with certainty is a fool’s errand, but FX traders won’t wait around to find out; they need to hedge. With the U.S. economy flashing slowdown signals, global trade tensions possibly escalation, and recession fears creeping into bond markets, expect JPY to be looked at closely.

The view

Markets had been cautiously leaning into optimism over a potential tariff delay or dilution, thanks to Commerce Secretary Lutnick’s weekend remarks on Fox News. His comments that Trump is still weighing his approach with Mexico and Canada, calling the situation "fluid," gave traders a flicker of hope for a softer landing. But let’s not kid ourselves—Lutnick also made it crystal clear that tariffs are coming on Tuesday, with the only real question being how hard the hammer will fall.

Meanwhile, Canadian Prime Minister Trudeau is sticking to his usual playbook, emphasizing that Canada is pulling out all the stops to prevent tariffs while promising a “strong, unequivocal, and proportional” response if push comes to shove. Mexico, on the other hand, is reportedly entertaining the idea of slapping tariffs on Chinese imports as part of a last-minute deal to dodge U.S. levies—a geopolitical Hail Mary that, if confirmed, could force traders to completely reassess their risk positioning.

The real wild card in all of this? China and Europe. Unlike their North American counterparts, Beijing and Brussels are almost certainly getting hit—with China facing another 10% tariff hike and the EU bracing for a 25% broadside. That’s double trouble for FX markets, with both the renminbi and euro facing downside pressure. On the yuan front, Chinese policymakers may well let it slide further to offset the trade hit. With USD/CNY inching toward the 7.5000 mark, expect broader Asian FX to feel the pain, particularly trade-heavy currencies like the Korean won, Thai baht, and Malaysian ringgit. Meanwhile, the euro's durability is about to be stress-tested, as EU leaders juggle economic resilience vs. trade war blowback.

Bottom line? Markets may have been pricing in a last-minute reprieve, but that optimism is hanging by a thread. Unless there’s a sudden about-face in negotiations, tariff risk is about to explode—and the FX board won’t be spared from the fallout.