Equity markets are stumbling and demand for safe haven currencies is on the rise as investors navigate the shocks from trade policy, geopolitics, and political uncertainty. The euro has pulled back from one-month highs against the US dollar, but remains 1% up year-to-date, whilst the pound is up 2% versus the dollar this month and inching closer to the €1.21 level against the euro, which has been a key resistance mark for the past eight years.
There’s growing confusion around the timing and scale of tariffs to be implemented by the US administration following President Trump’s cabinet meeting on Wednesday. Trump stated the 25% tariffs on Mexico and Canada would be implemented on April 2, rather than the looming March 4 date. It wasn’t clear if he was giving the countries additional time or confused with another program. Either way, the slew of contradictions has stoked investor skepticism over Trump’s policy agenda.
Equity markets have been rattled by the twists surrounding the tariff narrative, leading US equities to completely erase their initial post-election gains. Meanwhile, currencies appear to be more resilient, with realized volatility among G10 currencies shrinking recently. Despite tariff uncertainty, growth scare narratives have worsened, leading to risk-off market conditions. A combination of weaker growth and disinflationary forces is expected to encourage more interest rate cuts from the Federal Reserve (Fed), as markets now price two 25 basis point cuts for the year, against expectations of just one two weeks ago.
On the commodities front, oil prices have dipped to multi-month lows, losing around 4% this month alone as Trump’s aggressive trade moves triggered anxieties at a time when oil traders are already concerned about lackluster consumption in China. Hopes for potential peace deals between Russia and Ukraine are adding pressure to the commodities market, as lifting Russian sanctions could boost global oil supply.
The euro has retreated from its one-month high of $1.0528, with Germany’s 10-year bond yield also declining near one-week lows. Doubts about swift increases in European defense spending and its funding through bond issuance seem to contribute to the euro's fragility. Although Trump fired another round of tariff threats overnight, the euro was relatively calm, only falling 50 pips on the news. The euro is resisting the latest tariff threats, casting doubts on just how consequential such announcements will be on global markets.
With the situation varying significantly across the currencies, sterling is showing signs of strength due to higher relative interest rates against other G10 currencies. The pound has made gains against both the euro and USD this week, even though it faces key resistance at the 1.27-28 USD region.
Various signals indicate the British pound could face challenges. Investor sentiment surveys show bearish attitudes, and there is increased demand for protection against stock-market corrections. This mounting vulnerability could be exacerbated by the UK’s worsening net international investment position and persistent current account deficit, putting the GBP’s reliance on foreign capital inflows under strain.
Commodities and currencies are affected heavily by US trade policies, as seen with the Australian dollar, which fluctuated significantly after Trump indicated potential new tariffs on copper imports. The Aussie was hit hardest, with AUD/USD dropping to two-week lows.
Tonight, the second estimate of the US Q4 GDP will be released, with forecasts pointing to real GDP growth figures being revised from 2.3% down to 2.1%. This revision reflects lower than expected data on retail sales and corporate inventories – key drivers of the American economy. The US Dollar Index (DXY) slightly rebounded yesterday, climbing from its two-month lows, implying higher tariffs may lead to inflation concerns, keeping the Fed’s rates elevated for longer. A stronger GDP number could potentially push the USD even higher.
The uncertainty surrounding US trade policy continues to impact the global economic outlook as investors remain cautious and seek safe havens. It seems increasingly clear how interconnected US policy decisions affect not only investors' sentiments but have broader repercussions on global economic stability and market performance.