As we transition into the second half of the year, the desk emphasizes the critical impact of geopolitical tensions, oil price fluctuations, and upcoming tariff deadlines on FX markets. Per the full note from Standard Chartered, these factors are expected to shape market dynamics significantly, particularly in the context of Fed policy and inflation expectations. The consensus target for EUR/USD sits at 1.075, with a range between 1.04 and 1.12, indicating a cautious outlook amidst these uncertainties.
What the desk is arguing
The desk posits that geopolitical uncertainty and oil price volatility will play pivotal roles in shaping FX market movements in H2 2025. Per the full note from Standard Chartered, the upcoming tariff deadlines could exacerbate these tensions, leading to increased market volatility.
Furthermore, the Federal Reserve's policy stance remains a crucial factor, especially as inflation continues to be a concern. The desk highlights that any shifts in Fed policy could significantly impact currency valuations, particularly for the USD.
Where it sits in our coverage
Our consensus target for EUR/USD is 1.075, with a range of 1.04 to 1.12. Notable firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26) - citi: 1.08 (Mar26)
This view aligns with jpmorgan, which is positioned at the upper end of the range, while bofa presents a more conservative outlook at the lower end. The desk's call reflects a balanced perspective amid prevailing uncertainties.
How other firms see it
Several firms, including jpmorgan and citi, share a similar outlook, emphasizing the importance of geopolitical factors and Fed policy on currency movements. Conversely, bofa maintains a more cautious stance, reflecting concerns over potential economic slowdowns.
Key currency pairs to watch include EUR/USD, which is closely tied to ECB policy decisions, and USD/JPY, as shifts in Fed policy could have significant spillover effects on the Japanese yen.
What the calendar says
(omit this section entirely if no upcoming events)
Key takeaways
01Geopolitical tensions and oil price volatility are critical factors for FX markets in H2 2025.
02The upcoming tariff deadlines could exacerbate market volatility.
03Fed policy and inflation expectations will significantly influence currency valuations.
04Consensus target for EUR/USD is 1.075, with a range of 1.04 to 1.12.
Market implications
Traders should monitor the EUR/USD level closely, particularly as it approaches the consensus target of 1.075. Additionally, any announcements related to tariffs or Fed policy could serve as catalysts for significant market movements.
stanchart
Hello, I'm Eric Robertson, Global Head of Research and Chief Strategist at Standard Chartered. And I'm Madhur Jha, Global Economist and Head of Thematic Research also here at Standard Chartered. Welcome to Macro Freestyle, our monthly podcast series where Madhur and I will identify and explore topics that are likely to be most impactful and relevant for financial markets and the global economy.
Hi, Eric, and welcome back everyone to another edition of our podcast. We are recording this on June the 27th, and it's nearly at the halfway mark of the year. So we think it's a good time to reassess how the first half has been.
And more importantly, to discuss what we can expect for the second half. So let's start with me asking you about how do you assess how the first half of 2025 has been? What have been your most satisfying calls for the year?
And what has been a surprise for you? Madhur, thank you and good morning to you as well. In terms of the first half, I guess it's no surprise in some ways that we've gone through six months of a relatively high level of uncertainty.
Obviously a new president in the White House with Donald Trump, we were expecting quite a bit of uncertainty regarding tariffs. We knew there would be some geopolitical uncertainty as well. But I think everybody, ourselves included, have been a little bit surprised at the persistence and the magnitude of that, not only policy uncertainty, but the financial market volatility that's come with that as well.
In terms of the views, I guess there are three that I think are worth highlighting. The first is that I think we did a very good job of anticipating the increase in market anxiety around fiscal stimulus. We have yet to see details around the U.S. fiscal stimulus plan that will get through Congress.
We're waiting to see the final details on European fiscal stimulus and there's still this residual narrative around fiscal stimulus coming from China. But we did anticipate a big shift towards fiscal and we thought that that would have a big impact on long-term interest rates and the steepening of yield curves and we have seen that play out. The second one that I think is worth talking about is this idea that as China had to redirect exports away from the U.S. because of tariffs, that we would see a significant shift towards emerging economies and that the exporting of China's goods at perhaps lower prices would be effectively China exporting deflation to the rest of EM and we've seen that really in a very pronounced fashion.
Now the good news from that is it has allowed EM central banks to ease monetary policy and we have been pretty consistent in the view that that would be the case this year but I think that's continuing to play out very well. The theme that I think we really missed was the decline in the dollar. Our view coming into the year was that not only the economic uncertainty but also the America first nature of Trump's economic agenda would be supportive for one final rally in the dollar in the first half of the year and obviously the dollar has done exactly the opposite.
We've seen about a 10% decline in the dollar since the January highs. Thanks Eric and as you mentioned there's been so much uncertainty, there's been so much volatility. Recently, we had the escalation of the tensions between Israel and Iran but market reaction to that was surprisingly muted.
What did you make of that? Is this a sign that markets are getting fatigued by all this elevated uncertainty or is it something else? Well, I think there's a couple of points here.
The first of which is that we did see what I would call gap risk in the oil markets. We saw nearly a 25% rally in oil prices over the course of about five, six, seven trading days in June and then miraculously over the course of about two and a half trading days, all of those gains in oil were wiped out and we're sort of back to where we started. I think that is emblematic of what we are going to see over the course of the year which is this increased frequency of many volatility shocks.
Now whether those volatility shocks spread to other asset markets is the bigger question. Now as we all know in early April, we saw what I would call not just a volatility shock but a VAR shock and across the board reduction of risk. What I think markets are doing today is a little bit more nuanced and I think it is the fact that portfolios have broadly been de-risked so there's a lot less gross and net portfolio exposure out there.
I think there's less leverage now as well. The other thing to say about oil prices is if oil prices go up 25% and they stay there, then we need to start thinking about the implications for the global economy, global markets, etc. If oil prices spike and then come straight back down, then I think the market is very likely to look through that as we've seen and what is interesting is that we have for example US equities basically back to record highs, FX volatility is remarkably muted and rates volatility is pretty well contained.
So as you say, we are at a point now where it feels like markets are willing to look through some of this geopolitical uncertainty as long as it's not sustained. And I guess that brings me to a question that I wanted to sort of explore further with you Madhur which is on oil prices. You and the team have written a couple of notes over the last few months about the impact of oil prices, how they play out in markets, how they play out in the global economy and I wondered if you could help us think about some of the scenarios that you think are critical for oil and how it impacts the economic outlook.
Thanks so much Eric. Absolutely, you're right that the volatility in oil prices was really sharp, about $15 in both directions over a very short span of time. But if you look at it from the start of the year, on net, there's been a small reduction in oil prices and that usually tends to have a muted impact on the global economy for a combination of reasons.
First of all, oil price volatility itself has a more muted impact now compared to say in the 70s and 80s because of the rise of the services sector and falling energy intensity. Also because of the fact that there's a lot of large emerging markets that are importers of oil but they use subsidies to smooth out the consumption process. And finally and most importantly because of the credibility of inflation targeting regimes from central banks.
So you are seeing in general the impact of oil price volatility beginning to fall for most economies. In addition, it's become very apparent when we've looked at the history of oil price volatility and the global economy that oil price declines have a lower impact on the global economy than oil price rises. In fact, a 10% oil price rise will have almost double the impact on the negative side than a 10% fall in oil prices.
So overall, I think the impact is going to be fairly muted but we will see some impact coming through in terms of inflation. We've talked about the disinflationary trends in emerging markets. This just adds to that and a lot will depend on how open those economies are, how integrated they are in supply chains, how much space they have on the fiscal side to be able to smooth consumption for the consumers or for the businesses.
So a very good proxy that we use to see which countries are going to be more or less impacted on headline inflation is just the transport shares in the CPI baskets. But in general, the view is that the U.S. faces a little bit more of an inflation problem than the rest of the world because of what you've already mentioned. We can see continued periods of volatility but we have to, as of now, take into account the fact that oil prices on net are weaker so far this year.
And maybe staying with the U.S., Eric, you were in the U.S. recently. Did you feel that there was a change in mood there? I guess my experience in the U.S. recently reaffirmed a couple of the views that we've had as a team which is number one, this idea of divergence.
The divergence between the inflation narrative in the U.S. and the rest of the world is really becoming quite stark. The price level that you experience as a consumer, as a tourist, as a visitor is really quite notable. The cost of goods, the cost of travel in the U.S. is really quite high especially when I compare that to my travel in other parts of the world.
The second point is that I think the U.S. economy, consumers, businesses, you name it, everybody is braced for higher prices. The good news is that people are prepared for it or anticipating it. The bad news is there seems to be a foregone conclusion that we are going to see higher prices as a result of tariffs and as a result of the broader economic outlook.
On this theme of divergence, I would highlight and we talked about it in previous podcast this idea that the price level story in the U.S. remains threatening for the broader economy and whether that's inflation in a good growth scenario or a stagflationary scenario is I think yet to be determined but inflation is still very much a risk there compared to the deflation or disinflation narrative that you and I are talking about for the rest of EM. Another theme which I was a little bit surprised by is that I think the U.S. economy is holding up better than most people had expected and this is something I've written about in recent SMS reports but it does feel to me like there is a resilience in the U.S. economy that had not been expected. I think part of the reason for that was the 90-day pause in tariffs which has given both businesses and consumers the opportunity to preemptively build their inventories and that's a net positive but I also think certainly on the corporate side, there is a resilience which I think the markets had perhaps not appreciated and I suppose the risk is that if that continues, the market pricing around very aggressive Fed rate cuts which are now priced for about 125 basis points between now and the end of next year, that may get unwound at some point and so I think that's a risk that I see from both a market and an economic outlook for the U.S.
And staying with the Fed, you've already discussed the fact that the fiscal story has been key so far this year. We are expecting a lot more scrutiny of the U.S. fiscal bill over the coming weeks and months. What do you see the impact of that on Fed policy, Eric?
I think there is a really interesting shift in the way the Fed talks about its outlook for policy and what I mean by that is historically, the Fed has been willing to set policy based on what it forecasts the economy to look like in 6-12 months' time because they know that monetary policy operates with a lag but if you read Fed's speeches and especially if you read what Chair Powell has been saying, they really are trying to wait as long as they can before they make policy changes until they see hard evidence of either a change in inflation, a change in the labor market or a change in growth and we're seeing that in two ways now. We're seeing it with regards to the inflation debate and we're seeing it with regards to fiscal. I think the Fed baseline view at the moment is that you're going to see higher inflation in the second half of the year so that makes them a little bit uncomfortable and they assume that there's going to be more fiscal stimulus but they're not going to act preemptively.
If anything, I think their preferred policy response is to sit on their hands as long as they can until they see which direction the economy breaks. Now that may sound prudent and I think generally speaking, we would say yes that is a prudent policy but it also suggests that the Fed is less confident in its forecast and I don't think that's a criticism. I think that is a statement of the reality of the situation.
I think any of us in the forecasting business recognize that making point forecasts in this kind of an environment is extremely difficult. So in the short term, it means that rates volatility is a little bit lower because people expect the Fed to be on hold for protracted periods of time but it goes back to my earlier comment about gap risk. Once we start to see some evidence of the market breaking one way or the other or the economy breaking one way or the other, the market has propensity to I think react in fairly extreme fashions and so I think that's something we need to be very conscious of as the fiscal stimulus bill works its way through Congress.
I want to come back to tariffs. We've had the tariff pause if you will. It's now been roughly three months since the reciprocal announcements that we've seen a number of shifts in the tariff narrative over the last two months.
I was hoping you could give us your sense of the state of play. Where do you think we stand? What do you think the big risks are for the second half of the year and kind of walk our audience through how they should be thinking about things right now?
Sure, Eric. Maybe just to take a step back and look at what the impact has been in terms of the data. There was an inventory buildup that happened in the US in anticipation of the tariffs, right?
In Q4 and Q1, a lot of countries exporting much more than historical averages to the US. So, we've had the data for April and May since the tariffs were announced and of course the reprieve was also announced. We are seeing some softness coming through but that could just be a normalization of the fact that we've had so much front loading in Q4 of 2024 and Q1.
In addition, when you're looking at some of the data from China, there's a very significant decline in China's exports to the US. But overall, China exports have been rising, so they've been able to find other trade partners. So it is still very early days yet, but what we're getting so far is that there's a reorientation of trade but not a collapse so far.
But the longer this period of uncertainty lasts, the longer people are worried about where the tariffs will land, which countries will be targeted, what could be the potential response from those countries, the more likely we are to see a drag on growth, on demand and also on trade, of course. Some countries are benefiting and we are seeing countries gain market share with the US and others, but in general, there's a lot of uncertainty still. And when we look at the survey data, the PMI data in particular, we are seeing some of that softness coming through when we're looking at things like new export orders and also the divergence in terms of inflation being more of a worry in the US, but not so much anywhere else.
So the survey data in particular is beginning to show some signs of the impact. But the hard data, we will have to see what happens in terms of the actual announcements over the next few months. And I guess on a much shorter time frame, July 9th, which is a big expiry date of the three month pause, that's rapidly approaching.
What is your sense of how things play out in the immediate aftermath of July 9th? Are we going to get more extensions or do you think we're going to see material and tangible progress on tariff negotiations? Well, I think there has been some positive news, Eric.
I mean, we've had a few comments recently about trade deals being finalized with China and the US. We're still waiting for the details of that. We don't really know what the scope of those negotiations has been, but still, it's a positive step forward.
We might see a few more big trade deals being announced, potentially with India. But I think what we can expect after July 9th is an extended period of heightened uncertainty because there will be a lot more rounds of negotiations, potentially tariffs and countermeasures being imposed. I think for quite a few countries that are making good progress, the US might be a little bit more lenient, but the administration has been fairly firm in saying that they will be letting countries know what tariff buckets they fall in.
So we should see a little bit more information as we come through. And I do worry that a few regions like Europe, as well as those countries that are seen as transshipment centers, they might see higher tariffs. So transshipment centers are centers that seem to be importing more from China and then potentially re-exporting that to the US, which the US administration absolutely does not like.
So those countries might be seeing a little bit higher tariffs. But again, these will all be subject to further negotiations. So I think the bottom line is an extended period of uncertainty, which makes it a lot more difficult for businesses to make investment plans, to make hiring decisions, and for consumer confidence as well.
This is not a very positive sign. So the longer this period lasts, the bigger the drag on the global economy. And that's the kind of key risk in my view, that you have this lack of clarity on what is the policy direction from the US.
So Eric, we've talked about the tariffs and the uncertainty related to that. We've talked about the fiscal outlook for the rest of the year. But what else do you think our listeners should be focusing on for the second half of 2025?
I guess we should break it down into a couple of buckets. The first is the fiscal narrative. We'll get a lot more clarity, a lot more information about how much of the fiscal bill in the US gets through Congress.
The devil is in the details. And we need to see what actually gets through in terms of the net stimulus that is new versus extension of old. I think the European fiscal narrative is something that is potentially profound, but we've seen very little detail in terms of how much money will be spent in different sectors, how much of this is just Germany versus other parts of the EU.
And I guess, as I mentioned earlier, the big question mark for me is how much fiscal we do get from China. I think the data suggests that the first half of the year will look roughly in line with growth targets for China, in other words, pretty close to 5%. Our concern is that we will see a more notable tail off in China's economic momentum in the second half of the year, and that may prompt more fiscal stimulus.
The second bucket that I think is starting to get market attention is the state of play around the Federal Reserve. There's been a lot of discussion in the last week about President Trump potentially naming a successor to Chairman Powell. Rates markets are starting to react to that.
One theme that I think we need to pay very close attention to is to the extent the market believes that you will get a more dovish Fed chair, which is certainly possible, it will be interesting to see how the long end of the yield curve responds to that. If the market believes that you've got a Fed chair that would cut rates prematurely or unnecessarily, I think the long end of the curve would react very badly to that, especially when we've got fiscal stimulus coming as well. The final point that I think is very interesting is that we've seen actually very good performance across emerging market assets.
Emerging market local currency debt performing very well in the first half of the year. A big part of that is the FX gains that go along with that. Emerging market equities in some places doing very well, and it does feel like there's a little bit of a title shift back into some good EM asset performance.
Now the reality is that the flows from global investors have yet to match that performance and so what we're watching very closely is whether we start to see some of this diversification out of the dollar make its way into a number of these end user local currency debt markets. I guess one final point that I should make and we've touched on it a couple of times in this discussion is this persistence of economic uncertainty, geopolitical uncertainty and what that means for financial markets. Now I'm of the view that we will see an increased frequency of these volatility shocks or an increased frequency of what I call gap risk.
That makes markets very difficult to manage, but I think that's different than saying we will see sustained higher levels of volatility or VAR shocks and as we discussed with the oil market scenario, I think we're going to see increased examples of very idiosyncratic shocks where markets are just not prepared for the very localized shocks or uncertainty that play out. I think we're going to get a lot more of that in the second half of the year. I think we'll see it in the rates markets.
I think we'll see it in commodities. I think we'll see it in FX as well. So that I think it has to be one of our guiding principles for H2.
Thank you so much, Eric. I would invite everybody to continue to tune in to our podcast as we discuss a lot more of these topics and a lot more market moving and exciting developments for the global economy over the coming months. Thanks Madhur.
Great to have everybody back for the Macro Freestyle podcast. I've really enjoyed doing these every month and I think it's a great way for us to put our views on the table, test them against the markets and provide a lot of transparency to our clients to know exactly what we're thinking in real time. So look forward to having this discussion again with you Madhur in about a month's time.
Thank you everyone. Thank you for listening to Macro Freestyle, our monthly podcast series on all things macro. Please do join us again for next month's edition.
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