The Heat is On

July 14, 2025
6 min read
  • The White House dials up the pressure against Fed Chair Powell and sends more tariff letters. USD rally is not sustainable. No policy-relevant economic data release today.
  • UK job market cools. BOE risk tilting more dovish. GBP faces more downside versus EUR.
  • China’s trade surplus widens in June on solid export growth. CNH stable and China’s stock index near a year-to-date high.

Check-out our Drivers for the Week for an in-depth look at what markets are facing this week.

The Heat is On

US

USD is gaining against most currencies, with the DXY index probing resistance at 98.00. US and European equity futures are down. The White House sent letters on Saturday to the European Union (EU) and Mexico outlining the new 30% ‘reciprocal’ tariff rates they risk from August 1. The EU tariff is up from the 20% first revealed on April 2, while the tariff on Mexico will only apply on US goods imports not covered by the United States-Mexico-Canada Agreement (USMCA).

As of July 11, the overall US average effective tariff rate (which includes the 35% tariff on Canada) is estimated at 18.7%, the highest since 1933 and up from 2.4% in January. The average effective tariff rate is set to climb even further with the new proposed duties on the EU and Mexico. In our view, higher US levies is a downside risk to US growth and upside risk to inflation.

The White House ups the pressure campaign against Fed Chair Jay Powell by targeting the Fed’s $2.5 billion headquarters renovation. President Donald Trump can’t fire Powell, so he’s doing the next best thing – making staying on so miserable that Powell chooses to walk away.

With Powell on the ropes, the potential candidates for his job aren’t staying quiet. Kevin Warsh (member of the Federal Reserve Board of Governors from 2006 to 2011) said on Sunday “all this big money on big fancy buildings is just another indication” of how the Fed lots its way. Warsh added that the Fed needs to shrink the Fed balance sheet and cut interest rates. Similarly, White House National Economic Council Director Kevin Hassett said on Sunday that the Fed “has a lot to answer for” on the renovation cost overruns. Hassett highlighted back in June that the Fed has plenty of room to lower interest rates right now.

Bottom line: loss of confidence in US trade policy and political interference with the Fed’s independence spell trouble for the dollar.

UK

GBP is down versus USD and EUR. Leading indicators point to a weaker UK job market. In June, the KPMG/REC permanent placement index dropped further into contraction territory, and its gauge of staff availability rose the most since November 2020.

The chief executive of the REC said: “Much of that [hiring] hesitation stems from the scar tissue left by the spring tax hikes and fear of further business tax rises. Bank of England (BOE) Governor Andrew Bailey echoed the comments in an interview this weekend noting: “I think we’re getting more consistently the story that [businesses], if you take the national insurance change, are adjusting via the labour market.”

Sluggish UK GDP growth, stalling labor market, and the likelihood of higher taxes could force the BOE to cut the policy rate more aggressively than anticipated. The swaps market price-in 90% odds of an August cut and a total of 75bps of easing over the next 12 months. In contrast, the ECB’s rate-cutting phase is close to wrapping-up. As such, EUR/GBP has room to edge higher towards 0.8800.

CHINA

USD/CNH is stable under 7.2000 and China’s CSI 300 stock index is up near a its highest level this year. China’s June trade data underscores the widening gap between robust external sales and still-weak domestic demand activity. The trade surplus rose to a five-month high at $114.77bn (consensus: $112.1) vs. $103.22bn in May driven by stronger exports. Export growth increased 5.8% y/y (consensus: 5.0) vs. 4.8% in May reflecting the US-China trade détente. Imports rebounded 1.1% y/y (consensus: 0.3%) after plunging -3.4% in May, marking the first increase since February.

In our view, three major structural constraints prevent any meaningful effort to increase the role consumption plays in China’s economy: low household income levels, high precautionary savings, and high levels of household debt. As such, China will continue to lean heavily on infrastructure to hit its growth target. This is good for commodity prices but bad for China’s long-term economic health.

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