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Dollar jumps as US and China strike deal to slash tariffs

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12 May 2025

Written by
Matthew Ryan

Matthew Ryan is Ebury’s Global Head of Market Strategy, based in London, where he has been part of the strategy team since 2014. He provides fundamental FX analysis for a wide range of G10 and emerging market currencies.

The dollar leapt to its strongest position in almost a month this morning, buoyed by the news that the US and China had struck a deal to slash tariffs, at least temporarily.

T
he agreement will see a 90-day pause to the worst of the trade restrictions, during which time US levies on China will be cut to just 30% (from 145%), while retaliatory tariffs will be lowered to 10% (from 125%). Investors cheered the news, and the dollar has risen by more than 1% so far this morning in the hope that the signs of compromise and a de-escalation in the tensions will lessen the economic impact of the tariffs. This comes hot off the heels of last week’s news that the UK and US had reached an agreement on trade that, while limited in scope, was enough to push up risk assets and keep the dollar well bid.

Not only are the negotiations on trade beginning to bear fruit, but hard economic data in the US has yet to show any clear signs of damage from the tariff chaos, and the Federal Reserve appears comfortable sitting on its hands for a little while yet. We expect that focus will shift from hyped-up headlines around negotiations to macroeconomic data this week. The US inflation report for April is due on Tuesday and is expected to show a rebound from the previous month, although it is still probably too early to show the impact from “Liberation Day”. Retail sales and weekly jobless claims also bear watching.

Away from the US, all of the key reports from the Eurozone and the UK are from the period prior to the unveiling of the reciprocal tariffs, so markets will likely look right through them. A slate of speeches from Federal Reserve, Bank of England and ECB officials will, therefore, take on added importance this week.

GBP

While the Bank of England cut interest rates by 25 basis points as expected last week, the tone of the communications were more hawkish than expected. To our surprise, two of the hawks voted in favour of no change. The MPC also said that the tariffs would likely have limited impact on UK growth and inflation, and it repeated the line that further easing would be both “gradual and careful”. We saw an outside chance that the bank could tweak this language, but clearly the committee is not yet ready to commit to more aggressive cuts in light of nagging inflation risks, and markets now see just two additional cuts by year-end.

Sterling got an additional boost from news of a US-UK trade accord. The substance of the deal is thin, and does not appear overly favourable for Britain, given that the 10% baseline tariffs will remain in place, while UK levies on the US are cut sharply. Markets didn’t seem overly concerned, however, and the pound was among the top performers last week on the expectation that the impact of the new trade regime on the UK would be relatively light. This week’s labour data, though lagged, should be positive, showing further strong wage gains and job creation in spite of rising business costs.

EUR

Eurozone economic reports are the slowest to be compiled of all the major economic areas, so we still have not seen any hard data reflecting the impact of “Liberation Day” – only sentiment surveys. These confidence indices have shown relative resilience, and the massive German fiscal expansion package, which is expected to offer some much needed relief for the battered common bloc economy, provides another reason for optimism.

Market expectations for another three cuts out from the European Central Bank this year, and a low terminal rate of just 1.5%, are pricing in a lot of economic fallout from US tariffs that may not take place, especially given the more positive tone towards agreements that we’ve seen these last few days. This week there are few market moving events out of the Eurozone, so expect the euro to trade off of developments elsewhere.

USD

Other than surveys, evidence of any damage from the tariffs on the US economy remains hard to find. High frequency labour market data indicates that while companies are slow to hire, no significant layoffs are taking place. FOMC Chair Powell appears unconcerned during his presser last week, as he continued to describe the US economy as “solid”, while stressing that the bank needn’t be in a hurry to cut interest rates as it awaits further data on the fallout of the tariffs before deciding on its next policy move.

This week’s spate of April economic data (inflation and retail sales) will be key. Inflation is expected to rebound from its March trough, but tariffs will play a small part in this, since imports already on their way to the US in April were generally exempt from the tariffs. Likewise, April retail sales of imported goods were likely drawn from pre-tariff inventories. The next inflation print will probably be more relevant, but the high uncertainty highlighted by the Federal Reserve last week means that every data point will, nonetheless, be scrutinised to an unusually high extent.

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