Markets rally as US-China tariff rollback calms investors
Not long ago, a 30% tariff on Chinese goods seemed excessive. Today, it's part of a sweeping rollback that's helped trigger one of the strongest stock market surges since 2020. The S&P has soared in its best 22-day run since the pandemic, buoyed by renewed optimism as the US and China ease trade tensions.
The new deal slashes US tariffs on Chinese imports from 145% to 30%, while China cuts its own from 125% to 10%. China also plans to lift various non-tariff measures, though rare earths and tech sanctions were left unaddressed. The US will keep earlier tariffs on steel, intellectual property, and fentanyl, and low-value parcels under $800 from China remain subject to duties. Key sectors—like electric vehicles and aluminium—are still protected under existing tariffs.
Despite the upbeat markets, the US dollar remains 6% down year-to-date, even as it recovers from recent lows. Further gains will depend on stronger global demand. With a 90-day window for implementation and ongoing talks elsewhere—stalemates with Japan, no deal expected in South Korea, and looming EU retaliatory tariffs—uncertainty is far from over. For now, though, relief has returned to the markets.
Euro slips further as markets rotate back to US assets
The euro continues to weaken as easing trade tensions spark a reversal in the “sell America” narrative, lifting US equities and pushing oil prices higher. With volatility declining, the strong inverse link between the euro, US stocks, and crude prices is adding further pressure to the common currency, now nearly 5% below recent highs.
Oil's recent rally—driven by hopes that the global trade fallout may be less damaging than expected—is raising commodity prices. For Europe, a major oil importer, this spells higher energy costs, further dragging on the euro. On Monday, EUR/USD fell 1.4%, its sharpest daily drop since the post-election slump, dipping towards the $1.11 level. A break below $1.1084, the 50-day moving average, could open the door to $1.10 in the short term. Today’s ZEW surveys in Germany will be key in gauging near-term direction.
Attention may now turn to yield spreads. The Federal Reserve's cautious approach supports the dollar, especially against a backdrop of expected ECB rate cuts. However, any signs of US economic softening could reignite expectations for a dovish Fed pivot, tempering dollar strength and offering some relief to the euro.
Pound drops on Dollar strength, but Sterling outlook remains positive
The pound saw its biggest one-day drop in a month on Monday, slipping as the US dollar rallied on upbeat US-China trade news. GBP/USD is hovering near $1.32, down over two cents from its 2025 high, with a move toward $1.3091—the 50-day average—looking possible in the short term.
Despite the dip, GBP/EUR remains supported by easing UK recession risks, favourable yield spreads, and a trade boost from the recent US-UK deal. A break above €1.19 remains on the cards if risk appetite holds.
UK labour data showed unemployment rising to 4.5%, payrolls falling by 33,000, and wage growth slowing to 5.6%. While softer than expected, pay levels remain too high for the Bank of England to shift decisively towards rate cuts.
