April 02, 2025

“It is the day that the market has been nervously waiting for. Investors are on edge – nobody knows what is going to happen, and the reaction in FX could be almost anything. We get the news in a Rose Garden speech this evening.”

Tim Hallinan – Trading Director

USD

There is one thing on the market’s mind today: Trump’s ‘Liberation Day’ tariff announcements at 4pm ET (9:00pm BST / 10:00pm CET). The dollar has handed back all its gains from Monday overnight, however, as investors appeared to pull back slightly on their defensive positioning. Almost anything can happen today, because not even the White House is sure on the details of its ‘reciprocal tariff’ regime just yet. The Washington Post suggested that aides were now proposing a 20% blanket tariff rather than the country-by-country tariff rates, though the consensus seems to be more like the 10-15% range. Treasury Secretary Bessent described the initial duties as a ‘cap’ that countries would be able to push them lower by giving in to the administration’s demands. A higher-than-expected blanket rate with little leeway for negotiation, or an aggressive and confusing country-by-country approach is worst case for risk-sensitive currencies and should generally be good for the dollar – so long as that markets do not fret too much about a US slowdown. Lower tariffs that are framed as a negotiable, meanwhile, would be prime for a relief rally in currencies like NOK, SEK, CAD and AUD.

ADP non-farms is the only data point today. Yesterday’s JOLTS and ISM manufacturing were softer than expected, with the latter adding to the evidence of a stagflationary impulse this year as the overall index contracted but prices paid jumped to the highest since June 2022.

GBP

Hopes for a UK-US trade deal faded away yesterday and Starmer warned the cabinet to prepare for the imposition of US tariffs today. Trump has expressed an openness to carving out a deal for the UK, but the conclusion from business and trade secretary Reynolds yesterday was that, for now, ‘it might not be possible for any country in the world to be exempt from the initial announcements’. Nevertheless, there is still reason to believe that the pound would outperform in a risk-off, tariff-panic scenario, because of its smaller exposure to US goods trade, and relatively stronger chance of watering down the tariffs in the longer run. We will see that theory tested today.

EUR

It is all about the tariffs for the euro today. The EU’s digital services taxes, swathes of regulation, and VAT put the euro at greater risk if the US adopts a country-by-country reciprocal approach that takes all of these into account. With transatlantic growth differential no longer the gulf that it was, however, EUR/USD’s losses are likely limited, and parity is not on the table right now. Yesterday’s CPI print was soft, with the headline print falling to 2.2% and core inflation undershooting expectations at 2.4%. The story has not changed here – the ECB is well on its way to 2% inflation and it has a bit further to go before it stops cutting altogether. Media reports have suggested that the chance for a pause this month is higher than the markets are pricing in, but yesterday’s print makes that even harder to argue. A cut is 77% priced.

Markets

Trading was choppy yesterday, but US and European markets managed to push through the tariff nervousness and post some gains. Germany’s DAX stood out with a 1.7% gain, while big drops in Johnson & Johnson, Southwest Airlines, and Warner Bros capped the S&P 500 at 0.4%.

Main Economic Events (All Times CET)

2:15pm: US ADP Non-Farm Employment Change

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