International economic outlook: President Trump's tariff agenda is starting to take form

Summary

Forecast changes

• We have made adjustments to the tariff assumptions underlying our global economic and FX outlook. We now believe the 10% China tariff will remain in place through the end of Q1-2025 before ramping up to a 25% rate. China is likely to retaliate with a 25% tariff of its own, and we expect the U.S. tariff and retaliatory tariff to remain in place through the end of 2026. President Trump is also likely to impose tariffs on other trade partners, although select countries and goods may be excluded. To account for that uncertainty, we now assume an average U.S. tariff rate of 5% that goes into effect in Q3-2025, followed by matching retaliatory foreign tariffs.

• Tariffs can be disruptive to real economies; however, market participants seem less reactionary to tariff headlines in recent weeks. We believe this is a shift in tariff sentiment, and we now believe “tariff fatigue” is emanating across global financial markets. With market participants less focused on tariff headlines, and maybe only tariff policy implementation, the U.S. dollar can see less support from safe-haven capital flows. While we still forecast dollar strength into mid-2026, we see less dollar strength relative to last month's forecast.

• Some growth resilience and lingering inflation should now lead to a less aggressive Bank of Canada easing cycle. We have not made changes to our Bank of England or European Central Bank forecasts, while we continue to expect an aggressive Bank of Japan tightening cycle. While central banks globally are trending in a less dovish direction, we now believe the Central Bank of Mexico can move ahead with a deeper easing cycle. And finally, Germany's election was in focus recently; however, the outcome means any structural changes to the “debt brake” remain uncertain, and we maintain our bearish outlook on the euro and Eurozone economy going forward.

Key themes

• President Trump's tariff agenda is starting to take form. While tariffs have been implemented and threats administered, we are taking the view that not all tariff rhetoric will necessarily become trade policy. China appears to still be the primary target of tariffs and broader trade restrictions, although other U.S. trading partners are also likely to be affected by tariffs over the course of this year.

• Despite the likely impositions of tariffs going forward, we are also of the view that financial markets are becoming more resilient to changes in U.S. trade policy. In our view, a degree of “tariff fatigue” has set in, evidenced by volatility across financial markets declining despite tariff talk from the Trump administration not dissipating. While we acknowledge markets may also be too complacent, we now believe the U.S. dollar will see less safe-haven support going forward relative to out prior forecast.

• Tariff fatigue means FX market participants can start to refocus on underlying economic fundamentals and central bank monetary policy. In that sense, we still believe the U.S. dollar can strengthen as the Fed shifts less dovish at a time when foreign central banks are lowering interest rates. Also, U.S. economic growth continues to outpace foreign economy growth, and growth divergences should also be a pillar of support for the greenback over the medium term.

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