As expected, Trump has imposed a 10% baseline tariff on all imports, with steeper rates for key trading partners—34% on China and 20% on the EU. The main focus now is how the EU will react and what strategies it will adopt in response. As a result, the EUR faces increased downside risks.

EUR: Hit by 20% of tariffs

With much of the EUR-positive sentiment already priced in, the recent German debt break (focused on infrastructure and defense spending) is expected to have a positive economic impact only in the medium to long term. In the near term, EUR bulls will need to see evidence that expectations of aggressive fiscal stimulus can revive market sentiment in the Eurozone and potentially shorten the ECB’s easing cycle. However, as last week’s Eurozone PMI data suggested, FX investors may need to wait longer for signs of economic improvement.

Looking ahead, the biggest risk to the EUR is the potential announcement of reciprocal tariffs by the Trump administration on April 2. The EU has already signaled that it would retaliate swiftly, escalating the trade conflict. A trade war with the US would weigh on the economic outlook and delay any meaningful recovery in the Eurozone. ING estimates that such tariffs could shave 0.33% off GDP growth in the short term. While this may seem minor, it would be a significant blow to already struggling economies trying to reverse stagnation. Over time, the impact could grow even larger. Overall, as "Liberation Day" approaches, downside risks for the EUR remain elevated.

In the absence of significant tariff surprises, markets may shift focus to upcoming Eurozone data and ECB speakers, particularly the Eurozone flash HICP estimate and the final PMIs for March. The market expects the annual headline inflation print to decline to around 2.13% Y/Y, which is close to the ECB’s inflation target. Additionally, core inflation could dip below 2.5% Y/Y, partly due to temporary seasonal factors. If near-term data suggests that the ECB has largely achieved its goal of controlling inflation while the Eurozone growth outlook remains weak, it could reinforce market expectations for further ECB easing. With many EUR-positive factors already reflected in the price, the near-term outlook for the EUR will largely depend on US tariff developments. Absent any positive surprises, the EUR remains tilted to the downside.

As anticipated, Trump has announced a 10% baseline tariff on all imports, with higher rates for key trading partners—34% on China and 20% on the EU. The immediate focus is on how the EU will respond to these tariffs and what measures it will take to address them. Consequently, the risks for the EUR are now tilted to the downside.

USD: Safe Heaven? Buy in dips?

Recently, market sentiment has turned sharply bearish on the near-term outlook for the US economy. In particular, concerns are growing that policy uncertainty could weigh on consumer and business confidence, ultimately dampening domestic demand. The key focus remains on the announced and planned US tariffs, with many looking ahead to April 2, when the Trump administration is set to announce reciprocal tariffs against its trading partners. However, ahead of this so-called "Liberation Day," official statements and media reports suggest that the trade levies may target specific sectors, such as autos, and in some cases, could be delayed or used as a negotiation tool. Turning to FX, tariffs have traditionally been seen as negative for risk sentiment but positive for the safe-haven USD. However, the impact of next Wednesday’s tariffs should be mitigated by market fears of a US recession. Likewise, if the US imposes tariffs with a phase-in period, the hit to risk sentiment would be less severe, potentially making them less supportive for the USD. That said, if the tariff announcement aligns with expectations—either without new levies or with delays—it could provide some strength to the USD.

On the domestic front, headline PCE came in as expected, rising 0.3% M/M and 2.5% Y/Y. However, core PCE increased by 0.4% M/M and 2.8% Y/Y, surpassing analyst forecasts of 0.3% and 2.7%, respectively. This aligns with Fed Chair Powell’s estimate of 2.8% Y/Y, while the prior figure was revised up to 2.7% from 2.6%. Despite core PCE being the Fed’s preferred inflation gauge, the data did not significantly shift expectations. The latest FOMC projections still see core PCE at 2.8% by year-end, implying minimal progress on inflation this year—likely due to the implementation of new US tariffs, though uncertainty remains regarding their full impact. As a result, February’s core PCE reinforced the view that the Fed is in no rush to cut rates, offering marginal support to the USD amid broader growth concerns.

Looking ahead, market attention will be on March’s Non-Farm Payrolls (NFP), February’s ISM data, and the upcoming tariff announcement. Given the unpredictable nature of trade policy, markets will likely focus more on incoming US data and Fedspeak. For the March NFP, uncertainty remains high due to government job cut efforts from the Department of Government Employment (DOGE). Some noise is expected in the report, but it is unlikely to alter the Fed’s stance on the labor market, which remains balanced and not a primary driver of inflation. With markets currently pricing in a dovish Fed stance, any upside surprises in the data—combined with neutral guidance from Fed officials—could prompt investors to reassess expectations of nearly three rate cuts this year. This, in turn, could enhance the USD’s relative rate appeal.

Quick summary of President Trump's announcements: tariffs on the American continent are lower than expected, European tariffs are as expected, tariffs on Asia significantly higher than expected. There should be a straightforward FX re-adjustment between Asia FX (weak) and Latam FX + CAD (strong) in coming days.