Morning Report
May 12, 2025
“The news that the US and China agreed to significantly lower their trade tariffs has triggered a broad, strong dollar rally this morning, and it can move further if markets can be convinced that they will stick.”
Tim Hallinan – Trading Director
USD
The dollar is making a solid break higher this morning after surprisingly strong progress was made on trade de-escalation with China over the weekend. After talks spanning the weekend in Geneva, the US has agreed to reduce its tariff rate from 145% to 30% for 90 days, while China is reducing its tariff to 10%. Importantly, there was optimism on both sides, and there was a sense that they were able to reach some consensus relatively quickly. Treasury Secretary Bessent hailed ‘substantial’ progress, the reopening of communication lines, and the possibility for purchasing agreements with China to reduce the trade deficit. This is not the end of the story by any means, but it is substantially better news than the market was anticipating and there is a big dollar bid going on this morning. The safe havens – CHF, JPY, EUR – are the worst hit, with all dropping off more than 1% so far. They can move much further, but only if the good news persists and there is a longer-term improvement in the trade story – we haven’t quite unwound the April 2nd losses just yet. The market cheer is just as clear in the rates and equity markets, too, with only two rate cuts price for the Fed now this year and stock futures up 3-4% in the US. The main event on the data side this week is tomorrow’s CPI inflation, expected at 2.4%. An upside surprise might not have the same impact now that tariff levels have eased.
GBP
For sterling this morning, good news on US-China tariffs means weakness against the dollar and strength against the euro. The pound always traded as the riskier currency versus the euro when Trump’s trade shocks spooked the market, and it has unwound those losses as US sentiment has improved. Today brings speeches from Lombardelli, Greene, Mann, and Taylor at the Bank of England, who can give some more colour on the three-way split at last week’s decision between a 50bp cut, a 25bp cut, and no cut at all. The UK gets some important data, too, beginning with tomorrow’s wage growth data, which the BoE cited as the key driver of services inflation these days, and Q1 GDP later in the week.
EUR
The euro has sunk more than 1.3% against the dollar at the time of writing, as it gives up a proportion of its haven gains won after ‘liberation day’ last month. EUR/USD has now fallen nearly 4% from its peak three weeks ago – those levels were pricing in a catastrophic US-China trade war and potentially the loss of Fed independence. As these fears are being priced out, the euro is one of the worst hit. The unusual dynamics of FX under Trump 2.0 aside, however, a stronger growth outlook for China and the world is positive news for the eurozone economy, and the market is now betting on only two further cuts from the ECB this year. Meanwhile, news about the possibility for direct peace talks between Ukraine and Russia is good news for the euro.
Markets
Equity futures are a sea of green heading into the trading day in Europe and the US, as markets cheer the progress in de-escalation between the US and China. S&P 500 futures are 3% higher and the Nasdaq is up nearly 4% pre-market.
Main Economic Events (All Times CET)
1:01am: UK REC Jobs Report
To learn more about Ballinger Group, please visit our website or our LinkedIn page.