April 03, 2025

“There is carnage in the markets this morning after Trump’s tariff plans turned out to be much worse than most had thought. It is impossible to predict how this evolves, but investors are fleeing the dollar right now.”

Sam Cornford – Head of Trading

USD

Liberation day turned out to be far worse than the market was expecting, sending the dollar and stocks into freefall this morning. The final decision was broken down in a country-by-country list of ‘discounted’ reciprocal tariffs that Trump held out gleefully in front of the Rose Garden crowd, and the numbers were eye-watering. Market participants quickly sussed out the surprisingly simple formula used to arrive at these tariffs: (imports – exports)/imports/2. The EU gets 20%, China gets 34% (on top of the current 20% for a combined 54%), Vietnam gets 46%, Japan gets 24%, and the UK was lucky enough to land at the baseline 10%.

Right now, these tariff figures are pretty much the worst-case scenario that most institutions were modelling in the lead-up to the announcement. It is an historic move away from the post-WW2 norms of free trade, and recession risks have increased considerably. Judging by the market reaction, the biggest concern for investors is the US economy, rather than its trade partners. Three rate cuts are now priced in for the Fed this year, and the dollar index is down 1.8% since yesterday morning. When it comes to tariffs, the dollar has surely lost its status as a safe haven, and instead traders are seeking alternatives via the likes of JPY, CHF, Treasuries, and gold.

This is just the beginning for FX. On the one side, the fact that the reciprocal tariffs were ‘discounted’ by half means that there is clearly room for further hikes if other countries retaliate. On the other, Bessent has repeatedly described them as a ‘cap’ for those willing to give concessions to Washington. Also, while Trump has so far appeared to care little about the market reaction, most assume that there is some limit on how much pain he can take. Sentiment has deteriorated sharply, but perhaps not as much as one might think if investors were expecting them to persist – there will be more to come if it spirals into a tit-for-tat trade war.

GBP

Sterling has pierced through the 1.31 level for the first time in six months this morning as the dollar has sold off. The UK has only been hit by the baseline 10% tariff, and the indication from Starmer is that retaliation is unlikely. GBP/EUR has been quite choppy but is overall flat this morning, presumably as markets had already incorporated the UK’s easier treatment into the price. It is not clear that a trade deal can get the US to budge on the 10% tariff, given that it is the lower limit for all countries, and perhaps many had thought that the UK could manage to dodge all the tariffs.

EUR

The euro has come the closest to 1.10 since early October this morning, having risen over 1.7% over the past 24 hours. Its strength is a product of investors fleeing the dollar, rather than piling into the euro – the 20% tariff is a scary prospect for European policymakers. In normal times, market stress would be a clean and obvious negative for the relatively risk-sensitive euro, but with traders seeking alternatives to the US right now, it is the dollar that is suffering.

Markets

Stock futures are a sea of red going into today’s open, as Trump’s shockingly high tariffs have spooked investors. S&P 500 futures are down 3.3% and Nasdaq futures are 3.7% lower, while European indexes are looking at a 1-2% drop this morning.

Main Economic Events (All Times CET)

8:30am: Swiss CPI
2:30pm: US Unemployment Claims
4:00pm: US ISM Services PMI

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