Morning Report
April 04, 2025
“FX volatility surged yesterday as markets dumped stocks and the dollar. Non-farm payrolls is the key piece of data today, and we’ll be looking out for any more clues on the persistence of Trump’s tariffs.”
Tim Hallinan – Trading Director
USD
Yesterday was an historic day for markets, as traders ramped up their assumptions on the probability of a recession after Trump announced a once-in-a-century wave of protectionism. Tariffs were meant to be good for the dollar coming into 2025, but instead it suffered its biggest one-day drop since 2022. The US equity markets sold off at a rate not seen since March 2020, with the S&P 500 losing $2.4tn in market cap in a single day, while rates traders are now fully pricing in four rate cuts from the Federal Reserve. They were betting on only one just a couple of months ago. The effect of tariffs on the Fed path is not obvious, because their two main effects – an inflationary impulse and a hit to growth – cannot be leaned against at the same time. Policymakers will have to strike a balance depending on which has the bigger impact.
In FX, traders were focused on seeking alternative safety, as the US erodes its haven status through isolationist policy. The Swiss franc and the Japanese yen were the obvious candidates and they both gained more than 2% yesterday. The euro appeared to be the next choice and moved up by 1.8%. The biggest volatility was in USD/SEK for some unexplainable reason – there was a 3.5% peak-to-trough drop early in the day, though it only finished 1.5% lower by the end of the session.
Non-farm payrolls are the main event today. Markets are expecting 140K, but the risks are probably skewed to the downside for the dollar, given that a higher result will have little impact on tariff fears.
GBP
GBP/USD spent a short time above 1.32 yesterday but is trading a touch above 1.30 this morning. Sterling struggled to gain traction as much as its peers and fell on most of the crosses, with GBP/EUR down nearly 1.5% over the last day and a half. The UK was always assumed to be an outperformer in a trade war scenario, but the pound’s risk sensitivity appears to be taking over as investors opt for the more liquid euro. Sterling’s 2-year yield advantage has contracted by around 15bps, too, as the Bank of England is now expected to cut another three times before the end of the year. The focus today will of course be on the US, though there is a construction PMI this morning.
EUR
If the market had been given the ‘Liberation Day’ tariffs through a crystal ball on the 1st January, you would expect that most would have predicted EUR/USD to be below parity by now. Instead, it hit 1.11 yesterday for the first time in six months. The market has completely changed its reaction function, having lost confidence in the dollar as a safe haven. The euro is typically a risk-on currency – it tends to benefit against USD, CHF, and JPY when sentiment is improving, and investors are taking on more risk. But with the dollar – the first port of call during market stress – becoming increasingly unattractive as the US economy falters and policymaking goes unorthodox, the euro is looking like a reasonable alternative. The domestic data today is relatively light, so watch the tariff story and US non-farms.
Markets
US stocks posted their biggest drops since the onset of the pandemic in 2020 yesterday. The Nasdaq slumped 5.4% and the S&P 500 fell 4.8%, with the latter losing a ridiculous $2.4tn in market cap. The VIX rose to the highest level since August. Europe and Japan have suffered too – the Euro Stoxx 50 ended down 3.6% and the Nikkei extended this week’s losses to an eye-watering 9%.
Main Economic Events (All Times CET)
8:00am: Swedish CPIF Inflation
2:30pm: US Non-farm Payrolls
2:30pm: Canadian Employment Change
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