Markets have been very volatile overnight following the announcement of sweeping new tariffs from President Trump.
He announced a universal 10% tariff on all imported good into the US (starting 5th Apr), along with higher "reciprocal" tariffs on about 60 countries (starting 9th Apr), which includes key allies and major trade partners. Some of the notable tariffs include:
- China: 34% (which is on top of existing duties and takes their total tariffs to 54%!)
- European Union: 20%.
- Japan: 24%.
Markets had been bracing themselves for this announcement and they were steeper than many expected (particularly for China). There are now large concerns that this will lead to trade wars and that it risks sending the global economy into a negative spiral. Furthermore, although Trump’s tariffs are designed to hurt other countries, there is heightening fears that this will hit the US economy and potentially take them into a recession. In turn this would make the Fed more likely to cut interest rates. At the same time, these tariffs risk pushing up US inflation and therefore potentially creating a stagflation environment (e.g. weak growth and high inflation) which would be a very challenging situation for the Fed to navigate.
Consequently, this has led to a sharp selloff in the USD overnight and into this morning. The GBP/USD has travelled nearly 2.5 cents higher since yesterday and now trades at a 6-month high (and still looks like it has some steam left). The EUR/USD has risen over 2 cents from yesterday and now also trades close to a 6-month high (and testing the market rate of 1.10). The GBP/EUR continues to trade within the familiar ranges we’ve seen over the past week or so.
Uncertainty is still very much up in the air, and likely to remain high, as the market await the responses from other countries/regions (in particular Europe and China). Some US lawmakers have suggested that these are the highest the tariffs will be and then the expectations are that they will eventually get negotiated lower. However, no one is sure how long that would take to happen and therefore how much impact will ultimately be felt in the global economy before things can eventually reach a new equilibrium.
