EUR
While the 15% tariffs are clearly nowhere near as high as the 30-50% threatened by Trump in recent months, markets and European countries were clearly hoping for a better deal that would both offer greater concessions and bring the baseline levy closer to the 10% that officials had pushed for during negotiations.
Market participants will now be attentive to the scale of the impact of the tariffs on the Euro Area economy, although we’ll have to wait until the August PMIs (23/08) for the first real read of this. So far, at least, economic activity is holding up relatively well, with last week’s Q2 GDP report (1.4%) and July inflation figures (2%) both surprising to the upside. This should take pressure off the ECB to lower rates again, and markets now see little more than a 50/50 shot of another cut from the Governing Council before the end of the year.
USD
We’ve seen an extraordinarily topsy-turvy few days for the dollar, which rallied sharply throughout the week before being whipsawed following the release of Friday’s payrolls report. The Federal Reserve had struck a hawkish note following its meeting on Wednesday, as chair Powell both talked up the strength of the jobs market and hinted that it was in no rush to ease policy again. In a rare turn of events, two FOMC officials (Bowman and Waller) did, however, vote in favour of an immediate cut – the first time that two governors had dissented at the same meeting in over thirty years.
This dovish dissent, as it turns out, was far from unfounded. On face value, the July payrolls print is not a big cause for alarm, although this was completely overshadowed by the almost unfathomably large downward revisions to the May and June figures totalling 258k. This has both almost entirely changed our view on the US jobs market, while completely shifted the narrative for the Fed, which now seems will have little choice but to cut in September.
