tock markets managed to end the week sharply higher on the back of Trump’s backtracking on all non-Chinese tariffs. A far more ominous development was seen in US Treasuries and the dollar, however, which sold-off in tandem with equity markets, in what appeared to be a serious loss of confidence in US markets and institutions among investors. It was this very unusual move that seems to have forced Trump’s hand in at least delaying most tariffs for 90 days. Over the weekend, China was given an exemption in electronic devices, although characteristically members of Trump’s government gave incoherent messages about these measures right away. With few exceptions, every major currency worldwide was up against the dollar last week amid sky-high volatility in the FX market.

The key driver for markets will be whether this concerning dynamic, where US assets all move up or down in tandem (typical among emerging markets) continues, or whether sanity is restored in the White House and investors faith returns. Under normal circumstances, we would be discussing the labour market and inflation out of the UK this week, and the ECB meeting on Thursday, but these will be overshadowed by the newsflow out of Washington DC. That said, we will be keeping close tabs on the ECB’s discussion on the market chaos, Trump’s trade war and their expected impact on rate cuts. There is little doubt that one of those cuts is coming on Thursday. Much more doubtful will be the Federal Reserve’s ability to follow suit, unless the unpleasant market dynamics we described abate.

GBP

We have been surprised by the sterling underperformance relative to other European currencies, particularly the euro. The UK was slapped with the bare minimum 10% base tariff rate, and its goods exports to the US are only a small part of its mostly services-based trade sector. In addition to that, the monthly GDP figures for February numbers came out much stronger than expected, boosted by broad strength in the services, industrial and construction sectors, which should ease pressure on the government to hike taxes again in the Autumn.

We don’t think that the recent underperformance in the pound relative to the euro will continue for long. Britain’s economy appears well placed to weather the tariff storm, and the sharp move lower in the GBP/EUR exchange rate largely reflects the pound’s high-risk status, ensuring that the return to some sanity in the White House should be bullish for the UK currency. Resilient demand, relatively low exposure to Trump’s tariffs and substantial support from the Bank of England’s elevated rates lead us to consider sterling as the most undervalued of the main Western European currencies.

EUR

The world is looking at the euro as the most obvious substitute for the dollar as a store of value and a safe-haven, with markets that are large and liquid enough to accommodate the inflow. Unsurprisingly, the common currency is the best performing currency worldwide after the Swiss franc since the ironically named “Liberation Day”. The EUR/USD exchange rate is up a whopping 5% since 2nd April, with the gap between the rate on German 10 year bonds and US 10 year Treasuries exploding by around 50 basis points over the same period.

We think that the rally in the euro and the general market mayhem has almost certainly sealed the deal for another interest rate cut from the ECB at Thursday’s meeting, which is effectively fully priced in by swaps. The key focus for markets will be the bank’s remarks on the path ahead for policy, particularly the bank’s communications on how the tariffs may impact the economy in the common bloc. While the tariffs make further cuts highly likely, the Governing Council may refrain from committing to an explicit rate path given the acute levels of uncertainty.

USD

It is just as well that this week is a quiet one in terms of macroeconomic releases and policy news, because these would probably have been just ignored by traders. Investors remain focused on two factors. First, the chaotic trade policies emanating from the Trump administration, where a struggle for control is increasingly evident between the relatively orthodox secretary of the Treasury Scott Bessent, and colourful characters whose understanding of what is going on is more and more questionable, like Navarro or Lutnick.

While the damage to the real economy won’t be apparent for a while, consumer surveys are already showing a dramatic worsening of the growth outlook and a record jump in inflation expectations. The outlook is grim, and the main hope is that further market volatility will convince Trump to listen to Bessent and sideline his more questionable advisors. This could prompt a modest rebound in the dollar.