Markets were on an upswing this week, after the EU-US trade deal and strong earnings from US tech firms. But there was some trepidation as Friday is August 1st, when the 90-day moratorium on the “Liberation Day” tariffs would run out. And, in his usual style, Trump came out on Thursday to announce a wide range of tariffs, causing stock markets to sell off going into the weekend.
Given that foreign exchange is primarily used to pay for trade, the tariffs would, of course, be instrumental to Forex markets. This time around, it seems that patterns of the past didn’t repeat. Gold stumbled as the dollar continued to get stronger. The announcement of tariffs was widely anticipated, so it could be that markets are taking on a wait-and-see stance.
What’s New and Moving?
There were a lot of moving parts in the trade announcements, which left markets reacting with some uncertainty. The main point was the imposition of across-the-board tariffs on countries that had not secured trade deals, including major partners such as India. But the rates won’t go into effect until next Friday, presumably giving one more week to reach an agreement.
The UK and the EU were confirmed to have 10% and 15% tariffs, respectively. And this could explain the move in the dollar index. The vast majority of the dollar index is based on the pound and the Euro, which were not affected by the new tariff announcement. Other countries got special consideration, such as an extension of the negotiation time for Mexico after a last-minute call between the White House and Mexico’s National Palace. Canada had new tariffs imposed immediately on a different article. Negotiations with China remain ongoing.
The Dollar Rises, Gold Falls
The other factor affecting the EURUSD is the different outlook for the two economies. Both the US and the Eurozone reported flash Q2 GDP over the last week, and they were both higher than expected. But the US grew at an annual rate of 3.0% while the Euro Area grew at 1.4%. The Fed signalled that it would likely keep rates unchanged for longer, while price pressures in the Euro Area remain to the downside. That could renew pressure on the ECB to resume easing to prevent inflation from undershooting the target.
The difference in outlook could mean that investors reverse the trends of the first half of the year and start buying dollar assets again. It’s not strictly a risk-off scenario, which is why gold prices didn’t fall in proportion to the dollar’s gains. The high tariffs imposed by the US on Switzerland, however, had a greater impact on the Franc. Switzerland had been working to reorient its economy towards exports to the US due to slow growth in the Euro Area, leaving the Franc more vulnerable.
Where To From Here?
The following week is likely to be active on the trade front. Trump has repeatedly used the threat or even imposition of tariffs as a tool to get concessions. US Treasury Secretary Scott Bessent, the point man in trade negotiations, has said it’s part of a “maximum pressure” tactic. Several countries last week were reported to be close to a deal, including Taiwan and India. Those deals could be announced in the coming days.
Markets, therefore, are left with another week of trade uncertainty, and could take a cautious approach. Which could continue to support the dollar, and eventually the countries that have already secured more favourable trade conditions, like the UK.