March 04, 2025

“After a 30-day delay, Trump has officially gone ahead with significant tariffs on the US’ largest trading partners. MXN and CAD have weakened off, but not to the extent that we saw just over a month ago. That’s because markets are also contending with a weakening in the US economy.”

Sam Cornford – Head of Trading

USD

The US’ 25% tariffs on Canada and Mexico and 20% duties on China have kicked off a trade war today, with Trump saying that there is ‘no room left for Mexico or for Canada’ to negotiate or to satisfy the US’ demands on fentanyl flows. Interestingly, however, the adverse reaction has had a much stronger expression in the equity market than in FX. In anticipation of exactly this one month ago, USD/CAD shot up to 1.48 and EUR/USD sank into the 1.02s, yet the best the dollar can manage now is 1.45 and 1.05, respectively. So, what’s changed? The tariffs are no longer greeting a rock-solid US economy that can absorb their harmful effects. Instead, the data points to a softening, and the market is now pricing three rate cuts from the Federal Reserve this year – three times as many compared to just a month ago. The Atlanta Fed’s GDPNow forecast Q1 GDP growth sank to an incredible -2.8% yesterday after some soft ISM data. Do take that with a pinch of salt, though – while typically a very good predictor by the end of the quarter, it is not gospel, it is early days, and net exports are the major drag right now

In other news, Trump has suspended military aid to Ukraine after his spat with Zelenskyy on Friday. He will undoubtedly be mentioning that at his address to Congress tonight, where he has promised to ‘tell it like it is’.

GBP

The improving rate differential to the US has helped sterling to climb above the 1.27 handle this morning, having climbed over 1% so far this week. This is a dollar-driven move, and the market’s expectations for Bank of England cuts this year have been steady as bets on Fed cuts have been ramped up from one to three. The two-year yield differential has moved 35bps in the pound’s favour during that time, and GBP/USD has rallied more than 3%. No UK data today, but there is plenty going on in the US and Europe to move the dial.

EUR

A critical topic for Europe over the past few weeks has been defence spending, and a large rally in defence stocks helped to lift European FX yesterday. SEK in particular caught a huge tailwind and managed to surge 2.6% against the dollar thanks to its high sensitivity to the boom in European sentiment. Much of this appeared to be triggered by a Reuters report suggesting that Germany is trying to put together special funds worth nearly €1tn, split between defence and infrastructure. These funds actually getting spent is a very optimistic view to have, but nevertheless there is a growing desire for investors to shift to European defence companies this month. EUR/USD is still strengthening this morning, despite the implementation of tariffs on Canada and Mexico that have evidently boosted the chances that something similar happens to the EU soon.

Markets

Yesterday’s session was starkly different in the US versus Europe. While surging defence stocks dragged the Stoxx 50 1.4% higher and the DAX rose 2.6%, concerns about US growth and Trump’s tariffs saw the S&P 500 tumble nearly 2%.

Main Economic Events (All Times CET)

11:00am: Eurozone Unemployment Rate

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