Trump slaps 30% tariffs on EU, Mexico
A fifth straight decline in initial jobless claims places even more emphasis on Tuesday’s CPI data to vindicate markets’ residual bets on a September Fed cut. The consensus view has now emerged: a 0.3% MoM core CPI print. Before the key inflation test, EUR/USD may not trade too far from 1.170, but risks are admittedly more balanced now
USD: Eyes on Next (LON:NXT) Week’s CPI
The US dollar remains highly sensitive to data, while tariff news continues to have only a limited effect. Overnight, US President Donald Trump has threatened a 35% tariff on select Canadian goods starting 1 August and floated the idea of blanket tariffs of 15–20% on most US trading partners, up from the current 10% baseline.
In a letter to Canadian Prime Minister Mark Carney, Trump cited “unsustainable trade deficits” driven by Canada’s tariff and non-tariff barriers.
Yesterday’s fifth straight decline in initial jobless claims has reinforced the narrative that a sharp deterioration in the jobs market is unlikely to be what prompts the Federal Reserve to cut as soon as September. This puts even more emphasis on inflation data, due Tuesday. Consensus is centred around a 0.3% month-on-month core print, which would push the year-on-year CPI rate slightly higher, from 2.8% to 2.9%.
If it weren’t for the explicit dovishness from Christopher Waller and Michelle Bowman, and Trump’s persistent pressure on the Fed, a print like that would probably be enough to rule out a September cut. As things stand, it may take a 0.4% print for markets to fully price that out.
Today, the Federal budget balance for June is expected at -$30bn. While a major deviation could have some FX impact, the budget story appears to have been put on the back burner by markets for the moment. Tariffs, too, continue to touch the dollar only marginally.
Our view remains that unless the US targets its biggest partners – China, the EU, Mexico, or Canada – with new tariffs, the dollar is likely to look through this round of protectionism, with the FX fallout limited to local impacts, such as for BRL as discussed below. DXY may hold near the 97.50 level or trade modestly higher on some positioning adjustments ahead of next week’s CPI.
Elsewhere, Canada releases June jobs data today. Consensus is for no change in employment, while the unemployment rate is expected to edge up from 7.0% to 7.1%. Recent government spending cuts point to an increased risk of job losses, and in our view, markets continue to underprice the probability of a September rate cut by the Bank of Canada (15bp).
A particularly weak jobs print could even spark speculation of a move as early as 30 July. It may be too soon to position for CAD weakness ahead of any clarity on the US-Canada trade deal, but we continue to see the loonie as broadly unattractive.
EUR: Awaiting News on EU-US Trade Talks
There is still no news on the EU trade proposal to the US, but in our view, an EU–US trade deal is unlikely to have a significant directional impact on EUR/USD, which remains primarily tied to Fed and US data dynamics. However, in the absence of major data releases, markets may make some short-term adjustments should details of a draft deal emerge already today.
On the European Central Bank front, communication has been quiet, particularly on the topic of euro strength, despite it featuring heavily in Sintra discussions. Interestingly, French Prime Minister François Bayrou called on the ECB to provide more support via looser monetary policy. While this is unlikely to sway the Governing Council directly, it might highlight growing unease among European leaders about the risks of keeping rates on hold for too long, especially with a strong euro weighing on exports.
EUR/USD briefly dipped as low as 1.1670 yesterday, and while near-term risks look more balanced, if anything slightly skewed to the downside, the lack of fresh data suggests the pair may remain anchored around 1.170 for now.
Elsewhere, UK May GDP was disappointing, recording a second consecutive fall against consensus expectations of a small rise. The truth is these figures are highly volatile, in part because the first quarter was boosted by tariff frontloading and home sales ahead of the Stamp Duty hike in early April.
The Bank of England looked through the spike in Q1 GDP, concluding instead from the broader survey data that underlying activity was more or less flat. We’ll get more colour in next Thursday’s jobs report, and if things are bad, it would put serious pressure on the BoE to speed things up on rate cuts. However, sterling opens unchanged this morning, suggesting a similar market view.
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