The risk of higher US inflation has also clearly increased

President Trump failed to be swayed on his tariffs over the weekend, dismissing the sell-off in stock markets as the “taking of medicine”.

Yet, pressure on the White House to reverse, or partly dial back, some of its trade restrictions is immense, particularly given the reaction in equity markets (the S&P 500 index is currently trading around 11% lower already this month).

This will amplify the risk of a recession later in the year, as consumers traditionally dial back spending activity when they feel that their wealth has been eroded. Many of the big commercial banks now see more-or-less a 50/50 chance of a recession in 2025, which is probably a reasonable bet assuming that the tariffs remain in place at (or at least near) current levels.

It will be very interesting to see how the Federal Reserve responds to the stagflationary risks posed by the tariffs.

While the growth outlook has worsened, the risk of higher US inflation has also clearly increased, and this looks set to remain the priority for the FOMC, at least according to Powell’s comments last Friday.

Thursday will see the release of the latest US inflation data for March, but it will be too early to see any real impact of tariffs in the data. We expect the dollar to be favoured in the next few trading sessions as the safe haven currencies remain well bid, particularly if markets view current Fed pricing as excessive.

The Japanese yen and Swiss franc will, however, likely remain the low-risk alternatives of choice for now, with investors seemingly reluctant to bid up the dollar too much given the erratic and chaotic nature of US leadership.