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.

Trump set to reveal major trade reforms: A shift in U.S. global strategy

President Trump is set to announce a series of bold new trade measures today, sparking concern and anticipation among investors and international partners alike. These developments could have a significant impact on U.S. trade relations and cause volatility in global markets.

Sources close to the situation suggest that President Trump has yet to finalise his decision, despite the imminent announcement. The unveiling is set for 20:00 GMT, in the White House Rose Garden.  Although the tariffs are being presented as beneficial to workers and intended to boost revenue, doubts remain about whether the true aim is to secure better negotiating terms or permanently alter the U.S.’s trade strategy.

Advisors to the president are reportedly targeting $700 billion annually in tariff revenue, representing one of the most drastic shifts in U.S. trade policy in recent history.  Markets have already reacted with declines in equity values, pressure on the dollar, and heightened caution in the corporate bond sector, as reported by the Financial Times.

Sources close to the discussions reveal that the Trump administration is currently considering multiple tariff options. These include a tiered system, a customised reciprocal approach, and a a flat global rate, as reported by Bloomberg.

Each of these potential strategies represents a different way to fulfil the president’s long-standing promise to "level the playing field" in global trade. Tariffs are likely to be applied to goods already on their way to the U.S., prompting immediate concerns about potential disruptions to supply chains. Although enforcement is officially set for midnight, logistical challenges may delay its implementation, as seen with past measures targeting Canadian and auto imports.

Debate within the administration remains intense, highlighting ongoing uncertainty over both the strategic approach and the broader policy goals.

Tiered system

In an alternative tiered model, countries would be categorised into groups according to their current tariffs and non-tariff barriers, with duties set at either 10% or 20%. The highest levies would be reserved for nations considered the worst offenders in terms of protectionist policies.

Customised reciprocal approach

An alternative reciprocal model, previously championed by administration officials, would impose tailored tariffs based on the trade barriers that specific countries place on U.S. exports.

While this approach had been gaining support in recent weeks, it is now said to be losing favour and is no longer the primary option being considered.

Flat global rate

Flat-rate tariffs could be imposed across the board, potentially affecting countries with which the U.S. maintains no trade deficit, including the UK, with which it enjoys a rare trade surplus, according to Bloomberg.  While this approach may offer administrative simplicity, it risks provoking widespread retaliatory actions and complicating current trade ties.

Pound’s outlook amidst potential tariff shock: A mixed picture

Should a sharp market downturn follow the introduction of tariffs, GBP might see a decline against the EUR and USD, but could appreciate against the AUD and NZD. Nevertheless, indications suggest a more measured approach to the upcoming announcements, potentially allowing the UK currency to retain its status as a relative 'safe haven' amidst the trade turmoil.

GBP's safe-haven appeal stems largely from the UK's low exposure: the U.S. typically runs a trade surplus with the UK, placing it lower on the list of countries the U.S. aims to overhaul in terms of trade relations. That said, the introduction of a flat, blanket tariff could still create substantial challenges for UK exporters and put the GBP’s resilience to tariffs under strain.

We remain cautious, as severe tariffs could spark a market rout, traditionally weakening GBP against traditional safe havens like the USD, JPY, and CHF. GBP/EUR exchange rate would also likely face pressure in such a broader market sell-off.

EU prepared for retaliation amid growing trade tensions

The European Union has signalled its intention to retaliate should reciprocal tariffs be imposed. In the immediate term, tariffs risk reigniting inflationary pressures. Over the longer term, however, a trade conflict could suppress growth, emerging as a disinflationary factor for Germany and the eurozone as a whole. Germany’s 10-year Bund yield has fallen to its lowest point in four weeks, dipping below 2.7%, reflecting investor caution in light of escalating tensions.

Currently, money markets are pricing in a 75%-80% likelihood of an ECB rate cut in April, though policymakers remain divided. While additional policy easing could place downward pressure on the euro through reduced yield spreads, substantial fiscal stimulus measures could mitigate the effect on growth, limiting the need for aggressive monetary interventions.

Currency market reacts to tariff concerns and US data ahead of key announcement

At the start of this week, the currency market adjusted to the growing tariff threat, with the US dollar strengthening across the board, the yen finding support, and high-beta currencies coming under pressure. The Australian and New Zealand dollars have again been the main underperformers, likely due to expectations that China will continue to be a central focus of US protectionism. In Australia, the Reserve Bank of Australia kept interest rates unchanged overnight, as anticipated. The AUD initially responded positively to the rally but has since returned close to yesterday’s closing level.

Despite recent movements, the dollar has plenty of room to rise if tomorrow’s tariff announcement takes a hawkish (risk-negative) tone, although it remains susceptible to downside pressure from economic data.

The US economic calendar will be pivotal in determining today’s FX movements. However, unless there is a surprise in the data, we would not challenge the dollar’s tentative recovery. Recent comments from the US administration have reduced hopes for a more lenient tariff announcement tomorrow, potentially pushing the DXY above 104.50 ahead of the key release.

Today, JOLTS job openings for February are expected to show a moderate decline to 7.6 million, with additional focus on layoff figures. The ISM manufacturing index for March is forecasted to fall below 50.0, reflecting the worsening sentiment in the sector due to tariff uncertainty.

EUR/USD

EUR/USD managed to maintain its position yesterday, staying above the 1.08 level as markets prepare for the forthcoming "Liberation Day" tariff announcements from the Trump administration. The broader impact of these tariffs is adding to the prevailing uncertainty.

Germany's March inflation figures, which show a slowdown to 2.3% year-on-year, suggest potential interest rate cuts from the ECB, which could exert additional downward pressure on the euro in the longer term. However, in the near term, attention will remain focused on the reciprocal tariff announcements scheduled for 2nd April, as well as any retaliatory measures from Europe. This is likely to help keep the EUR/USD elevated for today.

With solid support at the 200-day moving average (DMA) at 1.0728, we expect the pair to remain above this level. However, potential gains appear limited due to ongoing concerns about global stagflation and recession risks. Today's EU inflation data is anticipated to show softer price pressures within the economy, helping to keep the pair within range.

GBP/USD

GBP/USD has managed to hold steady, maintaining its range between 1.29 and 1.30. The immediate technical outlook for the currency pair appears cautiously optimistic, with stability around the 1.29 mark. The Bank of England's cautious stance on monetary policy, influenced by February's CPI reading of 2.8% year-on-year, has sparked speculation about potential interest rate cuts in May. However, market focus remains on the near-term outlook, particularly the upcoming "Liberation Day" tariff announcements from President Trump, scheduled for 2nd April. Of particular interest is the proposed 25% tariff on the automotive sector, which could have significant implications for global trade dynamics.

While recent weakness in the US dollar has provided some support for sterling, this trend could quickly reverse depending on the scale of the impending tariff package. As such, the 1.2805 support level remains a critical area to watch for any signs of bearish momentum.

Markets on edge ahead of Trump's tariff announcement and global tensions

Financial markets are feeling the pressure this morning, as Donald Trump prepares to unveil a fresh round of tariffs on April 2nd, which he has named "Liberation Day." It appears the tariffs will initially affect all countries, with certain nations deemed favourable being exempted at a later stage. As a result, most stock indices have opened lower, while gold, a traditional safe-haven asset, continues to reach new record highs. Forex markets have seen only minor movements, potentially due to traders growing accustomed to Trump’s combative rhetoric, which often fails to materialise. The GBP/USD has risen to 1.2965, while GBP/EUR is up to 1.1970, suggesting the UK may have limited exposure to the proposed tariffs.

In other news, Trump has publicly criticised Vladimir Putin for not swiftly endorsing his peace plan for Ukraine. Looking ahead, key economic events this week include the Eurozone inflation data, due tomorrow, and the US jobs report on Friday, which is expected to show an increase of 139,000 jobs in March. EUR/USD is trading around 1.0820.

Pound posts gains against the Euro amidst volatility and uncertainty

The British Pound has made three consecutive weekly gains against the Euro, though the upward momentum remains fragile and susceptible to reversals. A notable example of such volatility was seen on Friday when the GBP/EUR exchange rate rallied to 1.2025, only to retreat sharply, ending the day with a modest 0.37% loss.

This highlights the unpredictable nature of recent price movements, despite the overall upward trend in the past fortnight. The Pound remains well-supported against the Euro, with potential buying support likely to emerge around 1.1943, the low from last Wednesday. As of Monday, the exchange rate is approaching this level amidst weaker global equity markets, reflecting investor unease ahead of Wednesday's U.S. tariff announcements.

Typically, market sell-offs tend to weigh on the GBP/EUR rate, suggesting downside risks as we approach Wednesday’s tariff event. Uncertainty surrounding the scale and timing of Trump’s proposed tariffs is likely to cause erratic movements, with little conviction in the currency market's response. Beyond Wednesday, it becomes more difficult to predict, as the Pound has sometimes acted as a hedge against tariff news. Given the UK’s relatively low exposure to U.S. tariffs, the Pound has occasionally found itself well-supported during tariff announcements. If this trend continues this week, a rally towards 1.2025 or even higher could be possible as the week progresses.