The DXY Index’s 2% plunge to 100.87 overnight is looking overextended. US President Donald Trump’s decision to delay tariffs by 90 days applies only to the reciprocal tariffs for countries that did not retaliate. The baseline 10% tariff is still in place for all countries, which National Economic Council Director Keven Hassett has confirmed will be a permanent measure, adding that only an extraordinary agreement could prompt a reduction.d
Following Hassett’s confirmation that US tariffs on Chinese imports effectively totalled 145%, the S&P 500 fell 3.5% overnight, giving back part of Wednesday’s 9.5% rally. Despite the lower-than-expected US inflation data, the US Treasury 10Y yield rose 9.3 bps to 4.25%, reversing two-thirds of the previous decline from 4.511% to 4.256%. Hence, the DXY’s decline could stall near the 100.16 low seen in late September.
Fed officials upheld the extended pause stance, pushing back the futures market’s bet for four cuts this year. Fed President Austan Goolsbee reckoned that interest rates would be lower in 12-18 months because of the “stagflationary shock” from the tariffs in place. The March CPI data did not capture the wave of tariffs announced in April. Given the Fed’s concern about longer-term inflation expectations becoming entrenched, pay attention to the University of Michigan’s Survey today. Consensus expects 5 to 10-year inflation expectations to increase to 4.3% in April after its post-election jump from 3.2% in November to 4.1% in March.
We are cautious about the EUR’s relief rally. Although Trump delayed the 20% reciprocal tariff on the EU for 90 days, the 10% baseline tariff and the 25% tariff on steel, aluminium, and autos remained active. Trump is looking to announce tariffs on pharmaceuticals soon. Following Trump’s rejection of the EU’s “zero-for-zero” tariff proposal, the EU faces difficulty reaching a comprehensive trade agreement with the US. Hence, we cannot rule out both sides returning to a tit-for-tat tariff conflict. Meanwhile, EU nations are worried that the high US tariffs on China would divert Chinese goods into the bloc.
Contrary to the US, the EU 10Y bond yield eased a second session to 2.58%. The European Central Bank is expected to lower its deposit facility rate by 25 bps to 2.25% at next week’s meeting on April 17. The OIS reckoned that there will be three more cuts in June, July, and September, bringing the rate down to 1.75%, the floor of the ECB’s neutral range of 1.75-2.25%. We noted that EUR/USD could not sustain its break below its range on the Fed’s 50 bps cut last September. We are not ruling out a similar outcome this time, either.
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