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This was the sign off from President Trump’s latest tariff announcement published on his social media platform, Truth Social. For those that didn’t see the post, it declared 50% tariffs in retaliation to the EU’s barriers to trade and trade surplus with the USA. Prior to this escalation in the transatlantic trade war, the EU’s retaliatory measures were not due to come into force until July.
FX markets were beginning to stabilise albeit with many key currencies including the Dollar having found new ranges. However, Friday’s announcement clearly brings back a level of risk that markets had largely begun to price out. Trump had originally chosen 1st June for the imposition of the tariff threat. On Sunday night, the President announced an extension by request of the EU Commission to July 9th in order to secure a deal. On Friday, the market had already been questioning the likelihood of these tariffs ever entering force – was this just another case of political economic brinkmanship as we have seen the President play with China earlier this month? He has certainly talked a tougher deal with the EU than with China despite threatening lower levels of tariff threats on the EU (so far) versus the peak of trade escalation with China.
In reaction to the news, the Dollar initially gained ground against the Euro. However, that faded on Friday as markets questioned the likelihood of such tariffs coming into force and the sell-America theme renewed. Thanks to the extension granted this weekend, the picture this morning is vastly different to what might have otherwise been. With the US and UK markets offline yesterday for bank holidays, today will be the first sessions to really analyse the market’s reaction to the weekend’s developments. There were two main beneficiaries to the Euro’s vulnerability on Friday: The Pound and the Japanese Yen. These currencies benefit from having deep liquidity as alternatives to the Euro or Dollar. The Yen in particular had the benefit of being a safe haven currency with EURJPY dropping sharply into last week’s close. As GBPEUR challenges recent highs, investors should remain vigilant to a rotation away from US debt spilling over to UK markets and eroding the Chancellor’s fiscal headroom.
Discussion and Analysis by Charles Porter
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