Dollar drifts higher

The dollar drifted higher during yesterday’s session but is not much changed following Donald Trump’s overnight confirmation of 25% tariffs on US steel and aluminium imports. The euro is trading at around $1.03 against the dollar this morning, while sterling has dipped to about $1.2350. This leaves EURGBP a touch firmer at just under £0.8350, though this is still off last week’s best levels of circa £0.8380 that followed Thursday’s more dovish than expected Bank of England meeting. Later today, Fed Chair Powell speaks on the outlook for the US economy and monetary policy.

In government bond markets, US yields were broadly flat at the start of the week, having spiked higher following Friday’s jobs report, while German and US yields extended last week’s decline albeit only marginally so. Equity markets performed relatively well given all the tariff talk, with US and European indices clawing back a good portion of Friday’s losses.

In a statement yesterday, the European Commission said “the EU sees no justification for the imposition of tariffs on its exports” (and) will react to protect the interests of European businesses, workers and consumers from unjustified measures.” It noted that “by imposing tariffs, the US would be taxing its own citizens, raising costs for business, and fuelling inflation,” adding that tariffs would also “heighten economic uncertainty.”

ECB President Christine Lagarde has told the European Parliament that “inflation is set to return to our 2% medium-term target in the course of this year, with risks on both the upside and the downside,” adding that “greater friction in global trade (i.e. tariffs) would make the Euro area inflation outlook more uncertain.” She also reiterated that the ECB “will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance.” The market expects the ECB to lower rates by another 25bps at next month’s meeting, with about 90bps worth of cuts in total priced in by end-2025.

In his testimony to the US Senate Banking Committee today, Fed Chair Powell is likely to reiterate than the central bank is not in a hurry to lower interest rates again, given solid economic growth, a strong labour market, and continuing above-target inflation. He will also no doubt face lots of questions regarding Trump’s tariffs and other economic policies. It is very quiet in terms of economic data, with the small business optimism index due in the US.