The drawbacks of the clawbacks. Our view from price action and client conversations is that markets think tariffs will be less durable than some of the other policy shifts that are more negative for the Dollar, and there is nothing in the contours of the tariff announcements we expect next week that will change that. Our economists expect a high initial headline, but a relatively long implementation period with an expectation that the final tariff levied will be lower than the initial proposal—negotiation is a feature, not a bug. While we think that markets are vulnerable to a negative surprise, the bar to deliver that next week is high (and probably more dependent on the implementation period than the initial “sticker shock”). And this is especially true in light of lingering concerns around the US growth outlook (in this regard, payrolls on Friday could be more important for the near-term direction of the Dollar than the tariff announcements, even though the latter are potentially structurally more important). Still, we think a more hawkish trade agenda should be Dollar positive over time other things equal.
Worries to the contrary have some validity, and the data are admittedly mixed, but we think the balance of price action and surveys thus far still support this conclusion. First, high-frequency price action has consistently showed the typical initial Dollar reaction to tariff headlines in both directions. Second, much of the Dollar’s fall so far this year can be attributed to the Euro after the German fiscal surprise—the broad Dollar is 2% higher than pre-election even as DXY is flat. Third, other policy issues—DOGE-related policy shifts and a potential embrace of greater fiscal restraint, for instance—have also contributed to uncertainty and to more concern about US growth, and it is completely normal for tighter fiscal policy and idiosyncratic slowdown concerns to weigh on the Dollar. In our view, recent weakness in consumer sentiment looks more consistent with these concerns than tariffs, especially after a more careful examination of the rise in household inflation expectations.
More specifically, while half of the respondents in the University of Michigan survey cited government policy as a source of unfavorable news for business conditions, only 1% cited the trade deficit (unlike in 2018-2019, when about 8% mentioned it). Instead, households were more likely to report negative sentiment for things like job security or making large purchases. And since December, our non-manufacturing survey tracker has fallen by 3pts while manufacturing surveys have improved on net, which is not the pattern one would expect if tariffs were the driving factor. Finally, while European data have been more resilient than expected, this is not universal. For example, Canadian business sentiment plunged to the lowest level in 25 years according to the CFIB survey, and our Canada CAI has fallen from north of 2% in Q4 to -1%. However, these points also reinforce what so far has been the main lesson for FX in 2025—these tariff increases are not occurring in a vacuum, and so far the balance of other measures has been negative for the Dollar.
Worries to the contrary have some validity, and the data are admittedly mixed, but we think the balance of price action and surveys thus far still support this conclusion. First, high-frequency price action has consistently showed the typical initial Dollar reaction to tariff headlines in both directions. Second, much of the Dollar’s fall so far this year can be attributed to the Euro after the German fiscal surprise—the broad Dollar is 2% higher than pre-election even as DXY is flat. Third, other policy issues—DOGE-related policy shifts and a potential embrace of greater fiscal restraint, for instance—have also contributed to uncertainty and to more concern about US growth, and it is completely normal for tighter fiscal policy and idiosyncratic slowdown concerns to weigh on the Dollar. In our view, recent weakness in consumer sentiment looks more consistent with these concerns than tariffs, especially after a more careful examination of the rise in household inflation expectations.
More specifically, while half of the respondents in the University of Michigan survey cited government policy as a source of unfavorable news for business conditions, only 1% cited the trade deficit (unlike in 2018-2019, when about 8% mentioned it). Instead, households were more likely to report negative sentiment for things like job security or making large purchases. And since December, our non-manufacturing survey tracker has fallen by 3pts while manufacturing surveys have improved on net, which is not the pattern one would expect if tariffs were the driving factor. Finally, while European data have been more resilient than expected, this is not universal. For example, Canadian business sentiment plunged to the lowest level in 25 years according to the CFIB survey, and our Canada CAI has fallen from north of 2% in Q4 to -1%. However, these points also reinforce what so far has been the main lesson for FX in 2025—these tariff increases are not occurring in a vacuum, and so far the balance of other measures has been negative for the Dollar.
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1. AccuTrade System:
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thedailyfx.com/performance/
3. We provide Free TradingView Premium and Essential Membership.
tradingview.com/v/yDFPnb1J/
2. Signal Performance:
thedailyfx.com/performance/
3. We provide Free TradingView Premium and Essential Membership.
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.