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Currency markets in holding pattern awaiting April 2nd tariff news

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31 March 2025

Written by
Ebury

C
urrencies traded within tight ranges of each other in a week when economic or policy news was relatively sparse, awaiting Trump’s announcement on “reciprocal tariffs” on Wednesday. This announcement will come right after a volley of 25% flat tariff on all foreign-made vehicles imported into the US. The consensus seems to be for a significant announcement that could bring the average tariff in the US to well above 10%, from just 2.5% before Trump took office.

The dollar is caught in the crosswinds between the boost one would expect from higher tariffs and the increasingly apparent economic damage from Trump’s chaotic policies and disregard for their economic impact. Inflation is rising as consumers retreat, posing a particularly difficult dilemma for the Federal Reserve. This week’s key releases will be the March flash inflation report in the Eurozone on Tuesday and a spate of US labor data starting Wednesday with the JOLTS report and culminating Friday with the all-important payroll report for March.

USD

Evidence that Trumpian chaos is harming consumer confidence, expectations, and spending is piling up, but it’s still short of dispositive. Consumer spending in February again undershot expectations, while the core index of the Fed’s preferred gauge, the PCE rose again on a monthly basis.

On the other hand, the March services PMI surprised heavily to the upside, driving the composite sharply higher. In addition to the tariff announcement, this week’s employment data (JOLTS on Wednesday, jobless claims on Thursday and, critically, the March payroll report on Friday) take on added importance to confirm whether consumer retrenchment is starting to affect business hiring decisions.

EUR

The March PMIs out of the Eurozone fail to reflect the optimism that has swept European financial markets after the massive fiscal stimulus announcement coming out of Germany. The composite PMI index was almost unchanged and is still consistent with near stagnation.

The flash inflation report this Tuesday should be better news for the ECB, as the numbers in France and Spain have surprised to the downside. The tariff announcement this week, however, should be the main focus of the week, given the Eurozone’s massive trade surplus with the US, and it’s difficult to see the common currency breaking to the upside under these conditions.

GBP

The UK’s economic outlook remains underpinned by improving demand and the UK’s relatively low exposure to Trump’s tariffs, as it is a country that mostly exports services and runs a significant trade deficit with the US. The PMI surveys of business activity for March improved meaningfully and unexpectedly, and are now consistent with steady growth, led by the services sector.

February retail sales also outperformed expectations, diverting attention from OBR’s halving of the UK’s 2025 GDP forecast to 1%. Moreover, British households received a welcome relief from a sharp drop in inflation. That said, persistently high growth in prices of services to the tune of 5% suggests it is not yet time for the Bank of England to abandon its cautious approach to policy easing, in our view. The combination of steadying growth, resilience to tariffs and better ties with the EU remains the key supportive factor for sterling.

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