Dollar plummets as tariffs fuel US recession concerns

Important calendar events

• JPY: Household Spending
• EUR: German Factory Orders, Italian Retail Sales 
• GBP: Construction PMI, Housing Equity Withdrawal
• USD: Average Hourly Earnings, Non-Farm Employment Change, Unemployment Rate

USD

The dollar plummeted on Thursday, and the index dropped from 103.2 to 101.4 but pared some losses later, climbing to 102.1. U.S. Treasury yields declined, with the US 10-year bond yield falling from 4.12% to 4.05%. 

US President Donald Trump has been using threats of imposing trade tariffs as a negotiation tool to further his agenda with other countries. Markets this week will continue to focus on Trump’s economic policies and trade tariffs, and Trump’s statements are likely to cause volatility in the price of the dollar. 

On Wednesday, Trump announced a 10% tariff on all imports into the US, as well as an additional 25% tariff on all imported automobiles. Concerns that US economic growth will slow down are putting pressure on the dollar, and many analysts are already expressing concerns that the US will enter a recession.

Trump’s tariffs may spark global trade wars and are causing turmoil in markets. Import taxes will raise the price of many products, fueling inflationary pressures. Other nations are likely to reciprocate with tariffs of their own, starting global trade wars, which may lead to economic deterioration and rising inflation in many countries.

The US Federal Reserve kept interest rates unchanged at its policy meeting in March. FOMC policymakers voted unanimously to maintain the federal funds rate in a target range of 4.25% to 4.50%. Policymakers remained cautious and opted to keep interest rates steady under a climate of economic and inflationary statements. 

Fed Chair Jerome Powell delivered a hawkish message after the policy meeting, stating that the central bank is not in a hurry to lower interest rates. Markets are pricing in two more rate cuts this year, with the first rate cut in June, while a third rate cut is also considered possible. 

On the data front, the US ISM Services PMI released on Thursday dropped to 50.8 in March, from 53.5 in February, falling short of expectations of a 53.0 print. Unemployment Claims for the week to March 28 dropped to 219K from 225K the week before.

ADP Non-Farm Employment Change data on Wednesday surpassed expectations, boosting the dollar. The US private sector added 155K new jobs in March against 105K anticipated, while February’s print was revised upward to 84K.

ISM Manufacturing PMI data released on Tuesday showed that the US Manufacturing sector dropped into contractionary territory in March, with a print of 49.0 below the threshold of 50.0 that denotes industry expansion. US JOLTS Job Openings came in lower than expected on Tuesday. Job openings dropped to 7.57M in February from 7.74 million in January, missing expectations of 7.63M.

The US economy expanded by 2.4% in the final quarter of 2024, against previous estimates of 2.3%, following a 3.1% expansion in the third quarter of 2024. In addition, the US economy expanded by 3.0% in the second quarter of 2024 and by 1.4% in the first quarter. US Unemployment Claims released on Thursday dropped to 224K for the week ending March 22 from 225K the week before, against expectations of a 225K print.

Headline inflation in the US rose by 2.8% year-on-year in February after rising by 3.0% in January against expectations of a 2.9% print. Monthly inflation rose by just 0.2% in February, after rising by 0.5% in January against a 0.3% rise anticipated. Core CPI, which excludes food and energy, rose by 0.2% in February, which was significantly lower than January’s reading of 0.4% and fell below expectations of 0.3%. Annual Core CPI rose by 3.1% in February, below the 3.2% estimate, down from 3.3% in January.

This week’s most highly-anticipated data are the labor data due on Friday and especially Non-farm Payrolls or NFPs. 

TRADE USD PAIRS

EUR 

EUR/USD surged from 1.086 to 1.112 on Thursday, its highest level since September, as the dollar plummeted. If the EUR/USD pair declines, it may find support at 1.073, while resistance may be encountered near 1.121.

The ECB lowered its benchmark interest rate by 25 basis points at its latest policy meeting, bringing its main refinancing rate down to 2.65% from 2.90%. In her speech after the policy meeting, ECB President Christine Lagarde reiterated her former statement that the central bank’s policy will remain data dependent and warned that the ECB will need to stay vigilant in these uncertain times. 

On Wednesday, Trump announced a 10% tariff on all imports into the US, as well as an additional 25% tariff on all imported automobiles. Several EU countries, such as France, Italy, and Germany export cars to the US and will be affected by these tariffs. Germany, in particular, sells 13% of its total automobile exports to the US. In addition, Trump announced 20% reciprocal tariffs on all US imports from the EU. 

EC President Ursula von der Leyen stated that the tariffs will have a significant impact on the global economy and warned that the Eurozone is ready to implement countermeasures if talks with the US fail.

Revised GDP data showed that the Eurozone economy expanded by 0.2% in the final quarter of 2024 after expanding by 0.3% in the second quarter, against original estimates of 0.1% growth. The economic outlook of the EU remains fragile as prolonged tightening has brought the Euro area economy to the brink of recession.

Eurozone inflation rose to 2.3% year-on-year in February after rising by 2.5% in January, against a previous reading of 2.4%. Core CPI, which excludes food and energy, dropped to 2.6% in February from 2.7% in January.

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GBP 

GBP/USD skyrocketed from 1.300 to 1.320 on Thursday, its highest level since October. If the GBP/USD rate goes up, it may encounter resistance at 1.330, while support may be found near 1.287.  

On Wednesday, Trump announced a 10% tariff on all imports into the US, as well as an additional 25% tariff on all imported automobiles. Trump’s administration, however, refrained from imposing additional reciprocal tariffs on British imports, as the UK has enjoyed a close partnership with the US for many years. 

BOE policymakers kept interest rates steady in March and the Official Bank Rate was maintained at 4.5%. MPC members voted 8-1 to keep rates on hold, with only one member voting for a 25 basis point rate cut. 

In his speech after the policy meeting, Bank of England Governor Andrew Bailey stated that there is a lot of uncertainty at the moment, but he still thinks that interest rates are on a declining path. The BOE currently anticipates that the British economy will grow by 0.25% in the current quarter, up from 0.1% previously.

Final GDP data for the fourth quarter of 2024 showed that the British economy expanded by 0.1% matching previous estimates and following economic stagnation in the third quarter of 2024. The British economy contracted unexpectedly by 0.1% in January after expanding by 0.4% in December, missing expectations of 0.1% growth. 

Headline inflation in the UK rose by 2.8% annually in February, down from 3.0% in January, against expectations of a 2.9% print. Core inflation, which excludes food and energy, rose by 3.5% year-on-year in February, falling below expectations of 3.6% as well as January’s print of 3.7%.

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JPY

USD/JPY plunged from 148.6 to 145.2 on Thursday, as the dollar plummeted. If the USD/JPY pair declines, it may find support at 145.0. If the pair climbs, it may find resistance at 151.3. 

The BOJ held interest steady at 0.50% at its policy meeting in March. BOJ Governor Kazuo Ueda stated that the central bank will keep adjusting the degree of monetary easing to support the country’s economy. Ueda stressed, however, that inflation in Japan remains below the BOJ’s 2% target, lowering rate hike expectations and boosting the Yen. 

Markets anticipate that the BOJ will raise interest rates at least one more time this year, and there is a high probability of a second 25-bp rate hike within the year. The BOJ is expected to raise interest rates by approximately 75 basis points in the next two years, which will bring the central bank’s peak rate to 1.25%. 

The Yen gained strength last week after the release of the minutes of the BOJ policy meeting in January. The minutes revealed that most BOJ policymakers felt that the likelihood of Japan’s inflation rising above the central bank’s 2% target is high. Some BOJ members also opined that the central bank should continue tightening its monetary policy if the bank’s inflationary and economic targets were achieved.

On Wednesday, Trump announced a 10% tariff on all imports into the US, as well as an additional 25% tariff on all imported automobiles. Japan is a major importer of automobiles to the US, and the tariffs are likely to affect the country’s economy. Trump also announced reciprocal tariffs of 24% on US imports from Japan. 

Final GDP data for the final quarter of 2024 showed that the Japanese economy expanded by only 0.6% against expectations of 0.7% growth. Final GDP data for the third quarter of 2024 showed that Japan’s economy expanded by 0.3%, down from 0.7% in the second quarter. 

Inflation in Japan is on the rise, raising the odds of future rate hikes and providing support for the Yen. The headline Tokyo CPI inflation rose to 3.4% annually in January from 3.0% in December. National Core inflation in Japan came in at 3.0% year-on-year in February against expectations of a 2.9% print, but came down from January’s 3.2% print. In addition, BOJ Core CPI remained steady at 2.2% year-on-year in February.

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Written by:
Myrsini Giannouli

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