Reciprocal tariff plans are not fully priced

What the desk is arguing

Derek Halpenny from MUFG argues that the US dollar's current weakness reflects a potential mispricing by the market in anticipation of the April 2 tariff announcement. He suggests that financial institutions may have built in excessive optimism regarding the tariffs' impact on currency valuations.

Supporting this view, Halpenny highlights a lack of concrete detail in the tariff plans that could lead to volatility post-announcement. By labeling the markets as overly optimistic, he implies that traders should brace for possible adjustments once the reality of the situation becomes clearer.

Where it sits in our coverage

In our current coverage, the consensus target for the USD remains at 1.075 against the euro, with a firm spread reflecting our view that there could be notable fluctuations depending on the outcome of the tariff announcements. Present expectations seem to diverge from this estimate, suggesting room for downside risk if actual tariffs differ from market assumptions.

• JPMorgan projects a target of 1.10 for the same period, reflecting a confidence in dollar recovery post-tariff announcement.
• Goldman Sachs estimates a lower target at 1.05, positioning themselves cautiously in light of potential adverse effects of tariffs.
• Barclays maintains a similar target as the consensus at 1.075, indicating a balanced approach toward recent developments.

How other firms see it

The sentiment captured by other financial institutions varies, with some firms echoing the cautious stance. For instance, Goldman Sachs holds a contrary view, indicating potential weakening of the dollar to a target of 1.05 as they factor in risks surrounding the tariff impact.

• Morgan Stanley remains aligned with MUFG’s cautious optimism, albeit with minor adjustments to their projections.
• Deutsche Bank is aligned with a stronger dollar narrative, forecasting a rebound to 1.10, showing a more optimistic scenario compared to others on the street.