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Trump’s “Liberation Day” tariffs crash markets

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7 April 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.

“Liberation Day” set off one of the worst crashes in risk assets worldwide in recent memory.

N
ot only were Trump’s tariffs much harsher than expected, but the arbitrary and chaotic way in which the actual numbers were produced further spooked investors. Equity markets suffered their largest sell-offs since the early days of the COVID pandemic, credit spreads blew out, and only the safe-havens benefitted. The initial reaction in currency markets was counterintuitive, as the dollar was dumped indiscriminately, contradicting conventional wisdom. By week-end, the dollar managed to bounce back against all but the safest of safe havens, the Swiss franc and the Japanese yen, although it still ended down against the euro. The worst hit were the currencies from commodity exporting countries, as commodity prices crashed and economists ratcheted up their expectations for a worldwide recession.

A 10% baseline tariff went into effect over the weekend, and the much more punitive and varying tariff levels on individual countries are set to do likewise this Wednesday. Over the weekend, Trump administration officials seemed to push back on the idea that negotiations could delay or avoid these tariffs, something that is unlikely to reassure investors. We expect markets, and FX in particular, to be driven by headlines about tariffs, retaliatory moves from US trade partners and potential negotiations, to the detriment of the normal macroeconomic and policy calendar. The one economic report that may draw investors attention is US March CPI inflation, which may start to show the early impact of the first round of tariffs on China announced earlier in the year. US consumer inflation expectations (Friday) will also bear watching for the same reason.

USD

It feels almost trivial to be discussing the March payrolls report after the mayhem of the last two days, but it bears noting that the last labour market survey conducted before the 2nd April shock was stronger than expected, with no hints of labour market damage, steady job creation and moderate wage gains. The report contributed to the rebound in the dollar after its surprising sold-off in the wake of the tariff announcements – ordinarily, rising fears over global growth would be bullish for the safe-haven greenback.

Communications from Federal Reserve chair Powell that the inflationary impact of the tariffs will be larger than he expected, and would make it more difficult for the Fed to cut rates, also buoyed the dollar on Friday. Futures markets now think that US recession fears will force the FOMC to cut rates on five occasions through year-end, yet we are very skeptical given the upside risks to inflation. This week’s inflation report may show the first hints of impact from the tariff announcements earlier in the year.

EUR

The US imposed a 20% tariff on the European Union last week. Given the wobbly state of the bloc’s economy, this may be enough to tip it into a recession. On the other hand, the impact of the massive German fiscal stimulus, and others that will probably follow, may be enough to counteract at least some of the contractionary impact of trade. The main issue here of course is that the impact on growth of the tariffs will be almost immediate, whereas the fiscal stimulus measures will take time to filter through to the economy, and may not be felt in earnest until 2026.

What is clear is that we face massive uncertainty, both with regards to the evolution of the EU economy and its currency. The initial response of markets was to treat the common currency almost like a safe-haven, which soared to its strongest position since October – dollar outflows have to go somewhere, and the euro is the most liquid alternative to the greenback. As of late-last week, the move in the euro faded somewhat, albeit the EUR/USD exchange rate is now back trading above the 1.10 level.

GBP

Sterling initially performed quite well in the immediate aftermath of Trump’s tariff announcement, given that the UK escaped relatively unscathed and only faces 10% baseline tariffs. Yet, the pound slumped sharply during the second half of the week, particularly relative to other European currencies, which is a big surprise given how Britain was spared from the worst of the trade restrictions. We think that this largely has to do with the currency’s high-risk status, and the market’s expectations that the tariffs could push the already fragile UK economy into a sharp downturn, while forcing the Bank of England to cut interest rates at a more aggressive pace in 2025.

That said, we think that the relatively low exposure of the UK economy to goods exports to the US, the resilience evident in the latest demand indicators and the labour market and still high interest rates from the Bank of England are all supportive factors for the pound. We think that the sell-off in the GBP/EUR exchange rate last week was overdone, and we actually think that the pound is well placed to weather the storm relatively well, particularly should the government manage to negotiate a US trade deal.

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