Dollar rises on Trump tariff talk
The dollar has risen across the board following the latest round of Trump tariff talk. Coming shortly after his promise to impose 25% tariffs on the EU, he said the currently paused 25% tariffs on Canada and Mexico will go ahead from next Tuesday and that there will be an extra 10% tariff on China from the same date (on top of the 10% tariff that went into effect earlier this year). The euro and sterling are both a good bit lower against the US currency trading at around $1.04 and $1.26 respectively this morning, the best part of 1.5 cents off their best levels of the week on Wednesday. EURGBP has been drifting down since mid-week and hit a year to date low of £0.8240 during yesterday’s session, though it is a touch firmer this morning at about £0.8260.
US stocks sold off sharply yesterday suggesting increasing investor concern about the potential impact of tariffs on the US economy, with the Nasdaq shedding almost 3% and the S&P 500 off almost 2%. Asian equities were very weak overnight, while European stocks are lower at the off this morning having lost around 1% yesterday. The price action in bonds has been relatively muted given the equity market backdrop, with US yields ending marginally lower yesterday and Euro area and UK yields edging down a little this morning.
In a speech yesterday, Fed member Schmid highlighted the dilemma facing the central bank which could make its “monetary policy decisions increasingly difficult.” He noted the increase in inflation expectations reported in recent consumer confidence surveys on the one hand, while warning that “elevated uncertainty could weigh on economic growth” on the other (with tariffs the common factor in both). In such circumstances, the Fed may decide the best course of action is to keep interest rates steady for now.
Looking to the day ahead, PCE inflation for January is due in the US – the consensus expects headline and core prices to have both risen by 0.3% last month, which would result in the annual rates of inflation nudging down to 2.5% and 2.6% respectively (from 2.6% and 2.8% in December) – while the ECB publishes its latest survey of consumer inflation expectations.