EUR / USD
EUR/USD sold off at the opening on Monday as markets offset the rally that followed Trump's sweeping tariffs, prompting the pair to correct to 1.0882. Markets continue to experience significant turbulence following Trump's tariff announcement, with the Fed acknowledging that inflation risks and slower growth are likely outcomes. China's retaliatory 34% tariff on US goods has escalated tensions and sparked fears of a full-blown trade war. JPMorgan has raised its global recession probability to 60% from 40%, while markets have priced in over 100 basis points of Fed rate cuts for 2025.
The Euro has shown resilience against the dollar despite typical risk-off conditions, supported by potential Ukraine peace prospects and promises of increased European government spending. More than 50 countries have reportedly approached the US for tariff negotiations, though Treasury Secretary Bessent warned quick deals are unlikely.
Despite today's expected weakness, we expect the EUR/USD to maintain elevated levels, with the support at 1.08 acting as a key threshold for the pair. A longer-term hold above this level would suggest that the market sees Europe as potentially benefiting from trade diversification away from the US.
USD / JPY
USD/JPY weakened once again on Monday as markets struggled above the 147.00 level, resulting in a correction on the open. Japan's substantial 24% tariff rate from the US has triggered strong safe-haven flows into the Yen, causing the currency pair to retreat sharply from recent highs. The Bank of Japan's stance has become increasingly important, with Governor Ueda explicitly stating that Trump's tariffs will exert downward pressure on both Japanese and global economies. The combination of trade tensions and potential Yen carry trade unwinding has created a fragile environment for USD/JPY, with many analysts eyeing significant downside risks.
Global central banks, including the Federal Reserve, are now faced with the challenging task of managing inflation risks while protecting against potential economic deterioration. The market's immediate focus will be on upcoming US inflation data and trade developments, which could provide early indicators of the tariffs' impact on prices and economic growth.
In the meantime, we expect this uncertainty to continue to feed into yen strength, with the 148.00 resistance likely to hold firmly.
GBP / USD
GBP/USD corrected on the Monday open, resulting in a breach of a near-term support level of 1.2875 to 1.2842. The next robust support level now stands at the 200 DMA at 1.2813.
While the UK received a relatively modest 10% baseline tariff compared to other nations, the broader market turmoil and potential slowdown in global trade threaten to weigh on sterling. Tariffs are likely boost inflation while slowing growth creates a challenging policy environment, with markets now pricing in 67 basis points of rate cuts from the BOE this year despite sticky price pressures. Britain's Prime Minister Starmer has emphasized maintaining "cool heads" amid the trade tensions, suggesting the UK will take a measured approach rather than rushing to retaliate.
The Bank of England faces a complex balancing act similar to the Fed, as higher import costs from tariffs may keep inflation elevated even as economic activity slows. Domestic UK economic resilience provides some support for sterling, with unemployment remaining low at 4.2% and wage growth steady at 3.8% year-over-year.
However, the pound appears vulnerable to further volatility as markets digest the implications of escalating trade tensions and their impact on the global growth trajectory. The 200 DMA support is now a crucial pivot point for the currency, and a breach below this level could trigger further weakness to 1.2735.
