Trade war triggers market chaos
In a move that has sent shockwaves through global markets, the Trump administration has rolled out an unprecedented set of tariffs, surpassing even the aggressive levies of his first term. The sweeping 10% duty on all imports has been compounded by additional surcharges on a range of nations, including China (54%), the European Union (20%), Japan (24%), and the United Kingdom (10%). These measures, largely determined by trade imbalances with the United States, represent the most severe tariff regime seen in over a century—eclipsing even the notorious Smoot-Hawley tariffs of 1930, which deepened the Great Depression.
Unsurprisingly, financial markets have reacted with alarm. Futures on the Nasdaq 100 have plummeted by roughly 4%, while the S&P 500 has fallen nearly 3%. Investors have scrambled for safety, driving gold prices to new record highs and sending US Treasury yields tumbling across all maturities. The resulting flight from the dollar has pushed the currency to a six-month low, with the yen and euro gaining ground.
Beyond the immediate financial turmoil, the economic consequences could be severe. With further tariffs on pharmaceuticals, semiconductor chips, timber, and copper on the horizon, the average US tariff rate is now set to soar from just 2.3% in 2024 to an extraordinary 23%. These punitive measures are likely to provoke retaliatory action from major trading partners, heightening fears of a global economic downturn.
In the short term, the spike in import costs will fuel inflation, eroding real incomes and curbing consumer spending. Equity market declines may further dampen household confidence via the so-called ‘wealth effect’. Meanwhile, ongoing uncertainty over trade policy will stifle business investment, exacerbating recession risks.
As for the dollar, its traditional role as a safe haven has done little to shield it from the fallout. Concerns over US stagflation and an impending economic slowdown are dominating investor sentiment, sending the greenback lower against major currencies. The Trump administration’s tariff war has now entered uncharted territory—one that could have lasting repercussions for both the United States and the global economy.
Sterling rises amidst trade war turmoil
The British pound has maintained its status as a relative safe haven amid escalating trade tensions. Like broader financial markets, sterling experienced volatility during Trump’s tariff announcement, briefly dipping when it was confirmed that UK imports would face a 10% levy. However, with other nations enduring far steeper charges, the comparatively mild tariff helped propel GBP/USD to $1.31 this morning—its highest level since October last year.
For weeks, GBP/USD had been consolidating around the $1.29 mark, sterling’s strength is not the sole driver—it is also the US dollar’s weakness. Other GBP currency pairs have shown mixed performance while the dollar has slid across the board. With US consumers and businesses now bearing the burden of higher import costs, fears of a US recession have surged, pulling Treasury yields lower.
Given the UK’s relatively balanced trade relationship with the US, it has avoided the harshest tariffs imposed on other economies. Prime Minister Keir Starmer will now push forward with trade negotiations in the hopes of securing a reduction in US tariffs on British exports. However, relief is already apparent—Britain’s 10% tariff is the lowest imposed by the White House, significantly lower than the EU’s 20% rate, a distinction that may be seen as an unexpected post-Brexit advantage. As the global trade war unfolds, sterling could continue to act as a relative safe haven.
EU Moves to Counter US Tariffs
The euro has found support as EU leaders take a proactive stance against US-imposed tariffs. In response to Washington’s latest trade measures, Brussels is preparing an economic defence package aimed at shielding European industries. This has helped push EUR/USD above $1.09 this morning, equalling its highest level since the US election.
Despite this rally, European currencies remain somewhat vulnerable. Trump’s increasingly combative stance towards the EU suggests that Brussels may have limited negotiating leverage, which could dampen the region’s growth outlook. However, the euro’s strength ahead of the tariff announcement came on the back of reports that the European Commission was preparing economic support measures. In addition, Germany’s expected fiscal stimulus should provide a further buffer, helping the bloc absorb the tariff shock. Meanwhile, the European Central Bank is likely to take a measured approach before making policy adjustments, meaning an immediate rate cut this month is unlikely as it assesses the impact of tariffs on both economic growth and inflation.
This cautious optimism is reflected in currency markets. Foreign exchange options traders appear increasingly positive about the euro’s trajectory, with risk reversals—an indicator of market sentiment—showing the strongest bullish positioning for the euro in over three years. Longer-term forecasts still suggest some downside risk, but the recent surge in sentiment marks one of the fastest shifts in outlook on record. As the EU steps up its response to US tariffs, confidence in the euro may continue to build.