Dollar falls after Trump's tariffs ruled illegal

A tentative rally in the dollar was sharply reversed over the weekend after the US Supreme Court ruled most of President Trump's tariffs to be illegal.

The president quickly reimposed a global 15% tariff for up to 150 days under a different and possibly sounder legal foundation, but for now US trade has been thrown into further chaos. Stock markets reacted very calmly and barely budged in response, a sign that the ruling had been largely priced in. Bonds, however, fell on concerns that the lost tariff revenue darkens the US fiscal picture. None of the market moves were dramatic, as markets bet that Trump will find other legal methods to circumvent the verdict.

Political risks are again front and centre for currency markets. In addition to the court ruling and Trump's response, the increasing likelihood of a US attack on Iran will focus markets attention this week. This will be a very quiet week on the macroeconomic front, with little news of note expected from the major economic areas. Aside from the Iran and tariffs headlines, it will be an unusually busy week for speeches from central bank officials, including the Fed, ECB and Bank of England.

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GBP

Economic news out of the UK last week had mixed implications for sterling. On the one hand, economic activity appears to be holding up quite well. Retail sales jumped in January by the most in nearly four years on an annual basis, and the composite PMI of business activity surprised to the upside, which has slightly dented market expectations for Bank of England cuts. Yet, the latest drop in inflation and further signs of weakness in the jobs market suggest that a March rate reduction remains the most likely outcome, and this remains roughly 80% priced in by swap markets.

While the turn for the better in the performance of the UK economy could support the pound in the near-term, we suspect that this will be overshadowed by political risks, with the future of Prime Minister Starmer still shrouded in doubt. A key by-election in Gorton and Denton on Thursday will probably be telling, with Labour looking likely to lose the seat to either the Green Party or Reform.

EUR

The February PMIs of business activity for the Euro Area surprised mildly to the upside last week, suggesting that the bloc’s economy continues to expand at a solid, albeit not exactly gangbusters, pace. Further evidence that the next change in ECB rates will be a hike came in the form of the fourth-quarter Eurozone negotiated wage survey, which saw wage increases rebound to an annualised rate of almost 3%. While last week's rumors of an early exit for ECB President Lagarde have clouded the rate path, the lack of a clear read on her possible successor has so far limited the fallout in the common currency.

The tariff news over the weekend has overshadowed all else, as the European Parliament is halting work on the trade treaty with the US until the chaos on the US side is resolved. The initial market reaction has been to buy the euro, further signaling the common currency's consolidation as a safe haven during US policy turmoil.

USD

Macroeconomic and policy news was overshadowed by the tariff ruling on Friday, but it is worth noting that most of the data released last week supported the Fed hawks. Durable goods orders, a raft of housing data and weekly jobless claims all came out stronger than expected. Furthermore, the minutes of the last Fed meeting were very hawkish and suggest that several FOMC members are close to considering hikes in the overnight rate. However dovish incoming Chair Warsh tries to be, he will have a difficult time dragging the rest of the voting members along.

Of course, the fresh tariff chaos takes front and center for now, but neither data out of the US economy or Fed communications seems consistent with a significant rate-cutting cycle. Friday’s sharp downward revision to the fourth quarter GDP estimate (to 1.4% annualised from the initial 4.4% estimate) is a clear break from this narrative, although investors have largely overlooked it given its datedness.

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