Dollar Firm as Trade Tensions Ease

April 29, 2025

Win Thin

Automakers may get some relief from the parts tariffs; this week may finally see some of the tariff impact on the hard U.S. data; March JOLTS data and Conference Board April consumer confidence will be reported; Canada’s Liberal Party will form a minority government; Chile is expected to keep rates steady at 5.0%
Eurozone April CPI and Q1 GDP data started rolling out; ECB March inflation expectations rose; U.K. retail outlet prices are still in deflation; Hungary is expected to keep rates steady at 6.50%
RBA Assistant Governor Kent spoke

The dollar is broadly higher on hopes of easing trade tensions. DXY is trading higher 99.291 on reports of some tariff relief for U.S. automakers (see below). USD/JPY is trading higher near 142.75 ahead of the BOJ decision Thursday. Elsewhere, the euro is trading lower near $1.1375 despite higher than expected inflation and inflation expectations (see below), while sterling is trading lower near $1.3385. CAD is outperforming modestly despite the inability of the Liberals to win an outright majority of seats (see below). We continue to believe that much of the recent dollar weakness is due to a growing loss of confidence in U.S. policymakers as well as the negative impact of tariff uncertainty on the U.S. economy. We view any relief rallies with skepticism. Until we get total clarity on the impact of U.S. tariff policy, we look for continued dollar weakness and view any dollar recoveries as fragile, no matter how the U.S. data come in. In that regard, this week brings key U.S. data that are likely to start showing some of the initial negative impact.

AMERICAS

Automakers may get some relief from the parts tariffs. Reports suggest President Trump will allow for some relief, with partial reimbursements given for auto parts tariffs based on the value of the overall domestic auto production. These reimbursements would be phased out over time, which means that auto companies would have a limited time window in which to move production onshore.

Tariffs are still impacting the U.S. survey data. The Dallas Fed manufacturing survey plunged to -35.8 vs. -17.0 expected and -16.3 in March. This was the lowest reading since May 2020. Almost 60% of the respondents said tariffs would negatively impact their business this year. Most respondents said they would pass higher costs onto their customers, but nearly 40% said it’s becoming harder to do so. The regional Fed surveys are setting the stage for a potential downside surprise for ISM manufacturing PMI due Thursday. Headline is expected at 48.0 vs. 49.0.

This week may finally see some of the tariff impact on the hard U.S. data. Q1 GDP growth out tomorrow is expected to slow sharply to 0.3% SAAR vs. 2.4% in Q4, while jobs data out Friday is expected to show only 134k jobs created vs. 228k in March. Spending and retail sales data have been distorted by tariff front-running but at some point soon, shortages and price increases will hit consumers hard.

March JOLTS data will be closely watched. Job openings are expected at 7.500 mln vs. 7.568 mln in February. If so, it would be the lowest since September. Keep an eye on the openings rate, which is expected to remain steady at 4.5%. A drop below this level typically signals a significant rise in the unemployment rate. Weekly jobless claims and April Challenger layoffs will be reported Thursday and will help round out a more complete picture of the labor market ahead of the jobs report Friday.

Conference Board reports April consumer confidence. Headline is expected to plunge to 88.0 vs. 92.9 in March. If so, it would be the lowest since January 2021 and would mirror the sharp drop in University of Michigan consumer sentiment. Eventually, the weakness in the survey data will translate into weakness in the hard data.

We get the final Q1 estimate from the Atlanta Fed GDPNow model. It currently estimates Q1 GDP at -2.5% SAAR and will be updated today after the data. The Atlanta Fed recently announced that it would update its model to adjust for gold imports. It has already been releasing an alternative gold-adjusted estimate (now at -0.4% SAAR) since March but this will be incorporated into the standard model starting tomorrow with its initial estimate for Q2 GDP. This comes ahead of the first look at Q1 GDP data tomorrow. Bloomberg consensus sees growth of 0.4% SAAR vs. 2.4% in Q4, with personal consumption expected to slow sharply to 1.2% SAAR vs. 4.0% in Q4. Elsewhere, the New York Fed Nowcast model estimates Q1 growth at 2.6% SAAR. We can’t recall any other time when the estimates from the Atlanta and New York Fed models were so far apart.

Canada’s Liberal Party will form a minority government. Initial results show the Liberals expected to win 168 seats vs. 151 previously, falling short of the 172 seats needed for a majority. The Conservatives are in second place with 144 seats vs. 120 previously. The Bloc Quebecois is on course to get 23 seats vs. 33 previously, while the left-leaning New Democrat Party (NDP) is forecast to have won 7 seats vs. 24 previously and short of the 12 seats needed to qualify for official party status in the House of Commons. CAD had a modest kneejerk downside reaction vs. USD as pre-election polls were skewed in favor of the Liberals winning a majority government. Still, USD/CAD has scope to resume edging lower on broad USD weakness, especially if technical support at 1.3800 gives way. However, we expect CAD to underperform on the crosses because of the severe negative impact of the US tariffs on the Canadian economy.

Chile central bank is expected to keep rates steady at 5.0%. At the last meeting March 21, the bank kept rates steady at 5.0% for the second straight meeting and noted that “The overall background information at hand points to an inflationary outlook that continues to face significant risks, stressing the need for caution.” Despite the hawkish guidance, the swaps market is pricing in another 75 bp of easing over the next 12 months that would see the policy rate bottom near 4.25%.

EUROPE/MIDDLE EAST/AFRICA

Eurozone April CPI data started rolling out. Spain’s EU Harmonised inflation came in two ticks higher than expected at 2.2% y/y and was steady from March. Spain is one of the only eurozone countries to report core inflation and it came in a tick higher than expected at 2.4% y/y vs. 2.0% in March. France, Italy, and Germany report tomorrow. France’s EU Harmonised inflation is expected at 0.7% y/y vs. 0.9% in March, Italy’s is expected at 2.3% y/y vs. 2.1% in March, and Germany’s is expected at 2.1% y/y vs. 2.3% in March. Eurozone CPI data will then be reported Friday. Headline inflation is expected at 2.1% y/y vs. 2.2% in March and core inflation is expected at 2.5% vs. 2.4% in March. Inflation is close to the ECB’s 2% medium-term target and tracking the ECB’s projections for headline and core inflation to average 2.3% and 2.2% in 2025, respectively.

The ECB reported March inflation expectations. 1-year expectations came in four ticks higher than expected at 2.9% vs. 2.6% in February and was the highest since April 2024, while 3-year expectations came in two ticks higher than expected at 2.5% vs. 2.4% in February and was the highest since March 2024. Expectations for inflation five years ahead, which are being reported for the first time this month, were unchanged for the fourth consecutive month at 2.1%. With longer-term inflation expectations still well anchored around 2%, the ECB has scope to ease further and offset the drag to growth from the trade war. The market has fully priced in a 25 bp cut at the next meeting June 5. Looking ahead, the swaps market is pricing in nearly 75 bp of total easing over the next 12 months that would see the policy rate bottom near 1.5%.

Eurozone Q1 GDP data also started rolling out. Spain’s growth came in a tick lower than expected at 0.6% q/q vs. a revised 0.7% (was 0.8%) in Q4. France, Italy and Germany report tomorrow. France is expected at 0.1% q/q vs. -0.1% in Q4, Italy is expected at 0.2% q/q vs. 0.1% in Q4, and Germany is expected at 0.2% q/q vs. -0.2% in Q4. Eurozone GDP data will also be reported tomorrow and is expected at 0.2% q/q vs. 0.2% in Q4. This is what the ECB projects for Q1, but the growth outlook has weakened because of the trade war.

U.K. retail outlet prices are still in deflation. The BRC shop price index fell -0.1% y/y in April vs. -0.2% expected and -0.4% in March. The breakdown showed food price inflation quickening while the decline in non-food prices eased. April CPI data will be reported May 21. Bank of England easing expectations have picked up. The market has fully priced in a 25 bp cut at the next meeting May 8. Looking ahead, the swaps market is pricing in 100 bp of total easing over the next 12 months that would see the policy rate bottom near 3.5%.

National Bank of Hungary is expected to keep rates steady at 6.50%. At the last March 25 meeting, the bank voted unanimously to keep rates steady at 6.5% and cautioned that “the uncertain international environment and the outlook for inflation warrant the maintenance of tight monetary conditions.” Governor Varga added “the key interest rate can stay at its current level for a sustained period.” Despite the hawkish guidance, the swaps market is pricing in 50 bp of easing over the next twelve months.

ASIA

RBA Assistant Governor Kent spoke. There was no policy-relevant insight from Kent. Instead, he discussed Australia’s external position and acknowledged “the sharp rise in volatility in FX markets in early April.” Indeed, global FX volatility increased in April to near a two-year high on tariffs related news. Ongoing uncertainties surrounding U.S. trade policies and the potential economic impact of tariffs are likely to keep FX volatility elevated.

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