Market focuses on impact of tariffs and ignores Trump – Commerzbank

The US dollar continued its recovery yesterday, a trend that has been ongoing for several days now. EUR/USD closed just above 1.16 at the end of the trading day, Commerzbank's FX analyst Michael Pfister notes.

Current recovery phase is unlikely to last long

"At first glance, however, yesterday's movement was difficult to understand. The headline year-on-year inflation rate was one-tenth of a percentage point higher than expected, while the core rate was slightly lower month-on-month (although the consensus was already close to the rounding limit). Nevertheless, the underlying data was clearly more relevant to the market: some categories likely to be initially impacted by the tariffs recorded further sharp increases. This reinforced market concerns that the tariffs are likely to have a stronger impact on inflation in the near future."

"Other categories are currently offsetting the stronger price increases. Nevertheless, yesterday the market ignored this, as well as US President Trump's continued vehement attacks on the Fed chairman. These attacks are no longer solely focused on interest rate policy, but increasingly on alleged mistakes in the renovation of the Fed. For example, overnight Trump emphasised that the renovation work was 'sort of' a fireable offense. By doing so, he once again played with the idea of dismissing Powell before the end of his term as Fed chair, although this ultimately remains unlikely."

"Fundamentally, the weakness of the USD looked like it has gone too far. It was unlikely that this trend would continue seamlessly. Short-term corrective movements are therefore not that surprising. However, the market should not allow these corrective movements to push the US dollar too far. Despite the effects of the tariffs being visible in certain areas, the Fed is likely to cut interest rates in September. Even then, Trump's attacks on the Fed's independence are unlikely to stop. A 25-basis-point cut is unlikely to satisfy him given that he is demanding 300 basis points lower rates. Accordingly, the current recovery phase is unlikely to last long as well."