Trump tariff delay triggers correction lower for USD?
At a Glance
The desk interprets President Trump's recent tariff delay as a catalyst for a potential correction lower in the USD, suggesting that trade policy decisions are increasingly influencing currency valuations. Per the full note from MUFG EMEA, the FX market is reacting to these developments, particularly in relation to the pound following the Bank of England's latest policy update. The desk notes that the current positioning may favor a weaker USD if trade tensions ease, as traders reassess risk sentiment. With no immediate high-impact events on the calendar, market participants may focus on upcoming economic data releases for further direction.
Key Takeaways
- 01Delay in tariffs may weaken the USD
- 02BoE's policy updates suggest GBP resilience
- 03Mixed views among firms on USD direction
Full Analysis
What the desk is arguing
The recent delay of President Trump's tariff imposition may lead to a correction lower for the USD as market participants recalibrate their expectations regarding U.S. trade policy. This pause suggests a potential softening in trade tensions, which could offer a temporary boost to risk sentiment and subsequently weaken the dollar as investors shift their focus towards higher-yielding currencies.
Supporting this view, recent updates from the Bank of England (BoE) indicate a cautiously optimistic outlook for the pound, which could further compound pressures on the USD particularly against GBP. The market appears to interpret the tariff delay as a sign of Trump's changing approach, thus enhancing the appeal of currencies perceived as less risky.
Where it sits in our coverage
Our consensus target for the USD is set at 1.075, which aligns closely with market movements influenced by recent policy updates. Current spreads suggest a level of uncertainty, particularly with the ongoing shifts in trade policy, reflecting divergence from some institutional views that expect stronger dollar performance in the medium term.
Notable targets as provided by specific firms include:
- Barclays: 1.08 (Mar26)
- JPMorgan: 1.10 (Mar26)
- Deutsche Bank: 1.02 (Mar26)
How other firms see it
There is a mixed sentiment among various analysts regarding the dollar's trajectory. While some firms maintain a cautiously optimistic outlook, others express concerns of a stronger downturn for the USD amid the evolving trade landscape.
Market Implications
The anticipated correction lower for the USD may boost risk appetite in the market, encouraging flow towards emerging market currencies and commodities. Currency pairs affected by this sentiment shift could see heightened volatility as traders reassess their positions amid ongoing trade policy uncertainty.
From the original
Lee Hardman, Senior Currency Analyst, and Abdul-Ahad Lockhart, Currency Analyst, discuss how President Trump’s decisions on trade policy have been impacting the FX market this week. Did the BoE’s latest policy update change their outlook for the pound? Disclaimer: www.mufgresearc
Related speeches
4 itemsWhat’s next for the USD after setback at start of Trump’s second term?
The desk anticipates a bearish outlook for the USD following the Fed's policy update, which could catalyze further declines in the currency. Per the full note from MUFG EMEA, analysts Lee Hardman and James Roulston highlight that the market is bracing for a dovish shift from the Federal Reserve, potentially leading to a weaker dollar in the near term. This perspective is underscored by recent economic data indicating a slowdown in inflation, which may prompt the Fed to reconsider its tightening stance. With no high-impact events on the calendar in the next month, the focus will remain on the Fed's upcoming announcements and market reactions to them.
FX Daily: A much more cautious de-escalation trade
The desk believes that the FX market is exhibiting a more cautious stance towards de-escalation trades, as indicated by President Trump's comments about negotiations nearing completion. This shift comes alongside a hawkish Federal Reserve backdrop, which limits opportunities to short the dollar. Per the full note, market participants are now more selective about potential gains from USD weakness, while upcoming PMI data is expected to attract attention in the market. With this context, the dollar remains a challenge for traders betting against it.
How has the FX market responded to Trump’s latest tariff announcements?
The desk believes that the FX market's response to President Trump's recent tariff announcements reflects a cautious sentiment among traders, particularly impacting the USD/JPY pair. Per the full note from MUFG EMEA, the yen's recent weakness is exacerbated by rising political uncertainty in Japan ahead of the Upper House elections. This backdrop suggests that the market is pricing in potential volatility as traders assess the implications of U.S. trade policy on global economic conditions. Our consensus target for USD/JPY aligns with this cautious outlook, particularly in light of the absence of high-impact events in the near term.
Thoughts from Asia & Europe on what has been contributing to a weaker USD
The desk posits that a combination of geopolitical tensions and economic policy responses in Asia and Europe is contributing to a weaker USD. Per the full note from MUFG EMEA, analysts Lee Hardman and Michael Wan highlight the impact of Trump's tariff policies and the potential for political shifts in Europe, particularly with the upcoming German elections. The desk notes that these factors have led to a shift in market sentiment, with traders increasingly favoring currencies that may benefit from a more stable geopolitical landscape. This sentiment is reflected in the broader market dynamics, where the USD has faced downward pressure against major currencies.
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