Sentiment was given a lift in Asia by newswire reports that US President Donald Trump’s reciprocal tariffs may be of narrower scope than envisaged by investors. Trump’s National Economic Council director, Kevin Hassett, said markets are overestimating the scope of the tariffs.
US Treasury Secretary, Scott Bessent, has suggested certain countries which are deemed to be the worst offenders in terms of their uneven trade with the US will be the targets of the tariffs. There is even speculation of some countries being excluded from the tariffs where investors had previously assumed there would be blanket tariffs.
At the time of writing, S&P500 futures were trading in the green, but a majority of Asian bourses were trading in the red. Risk-on trading, higher UST yields and weak Japan PMI data led to the JPY being one of the worst performing G10 currencies during the Asian session. The NZD was the weakest G10 currency due to a short squeeze in the AUD/NZD cross. The Scandinavian currencies and the AUD were the best performing G10 currencies during the Asian session.
Since tentatively having longer legs to fresh five-month highs above 1.0950 at the start of last week, the EUR/USD rally has thereafter stalled with a spot pullback of over one big figure. This has followed a similar sort of move in rates/yield spreads, as of special note the 10Y Bund yield has retraced to 2.75% as the German Parliament ultimately approved the massive fiscal spending plan. A crucial point about the broader EU fiscal impetus will be how long it takes for the fiscal multipliers to underpin economic activity in the area, while early on such ambitious prospects could still be useful to boost confidence.
Yet, it may still be too early for today’s Eurozone flash PMIs to register a sizeable firming into expansion territory this month, especially as many economic sectors across the Eurozone remain under the threat of additional tariffs from the US administration, even though the EU has recently postponed the effective date of its first retaliatory measures.
Only a bounce in the Eurozone composite index above the summer highs of 51.0 and towards May’s peak of 52.2 may possibly revive EUR upside momentum, as we instead see some consolidation prevailing ahead for EUR/USD, as our new EUR/USD forecasts contemplate some stabilisation around current levels until the middle of the year.
