Monday’s foreign exchange markets saw the euro maintain its prominence, influenced by the possibility of a Ukraine ceasefire between the US and Russia.
The EUR/USD rally has not surpassed 1.05, yet currencies like the Swedish krona and British pound, along with the Swiss franc, have shown notable strength against the US dollar within the G10. This trend extends beyond Europe, with currencies such as the Brazilian real and Mexican peso also gaining ground, signaling a broader relief from concerns over US tariff threats.
The anticipation of reciprocal US tariffs, initially suggested by President Trump on February 7, materialized last week on February 13. Markets reacted positively to the delay in their implementation until at least the April 1 deadline for trade studies. Consequently, short-term EURUSD implied volatility dropped significantly, reaching lows not observed since early November 2024.
UBS analysts have consistently warned that tariff risks might be underestimated by the market. The recent tariff extension, now encompassing Value Added Tax (VAT) and non-tariff barriers, underscores the potential impact on foreign exchange, especially for the euro, due to Europe’s high VAT rates.
Despite the postponement of these measures, the looming deadlines for 25% tariffs on Mexican and Canadian goods under the International Emergency Economic Powers Act (IEEPA) on March 4, and for 25% tariffs on steel and aluminum imports under Section 232 on March 12, suggest that the current easing of trade policy concerns could be brief.
The UBS US economics team anticipates that the proposed steel and aluminum tariffs would have a minimal effect on GDP and inflation (a 7.5 basis point increase on PCE prices, assuming no counteracting currency movements), which implies a relatively low threshold for their enactment.
Should these tariffs be implemented as planned in early March, the market’s current mild outlook on broader US trade policy risks could quickly change. However, for the next two weeks, the absence of new tariff announcements from the US could allow the current benign market sentiment to persist.
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