- SCOTUS tariff ruling threatens US fiscal credibility and risks fueling trade frictions – a structural drag on USD.
- Weekly data dump to leave major central banks rate bets unchanged. President Trump’s State of the Union address is on Tuesday.
- US-Iran on the brink of all-out war. Crude oil prices overshoot limited.
Judicial Check on the Oval Office
On February 20, the US Supreme Court (SCOTUS) ruled against President Donald Trump's use of the International Emergency Economic Powers Act (IEEPA) to impose most of his new tariffs. The immediate market reaction was positive for risk assets (stocks up, Treasury yields slightly higher, dollar softer) because the removal of broad IEEPA tariffs reduced expected drag on US growth.
According to the Yale Budget Lab, before the IEEPA tariffs were struck down, consumers faced an overall average effective tariff rate of 16%, the highest since 1936. Immediately following the IEEPA ruling, the rate fell to 9.1%. Nevertheless, we anticipate limited follow-through from Friday’s market moves given that alternative measures, though more convoluted, are in the pipeline that will keep most of the tariffs in place, such as Section 232, Section 301, Section 122, or Section 338.
After the SCOTUS ruling, the Trump administration announced a temporary flat 10% tariff, which was raised to 15% on Saturday, on all imports under Section 122 of the Trade Act of 1974. The Section 122 import duty will take effect on February 24 and can remain in place for a maximum of 150 days, through July 24, without Congressional authorization. During this period, the US average effective tariff rate is expected to be 13.7%.
According to Global Trade Alert, Brazil, China, and India are the biggest winners from the SCOTUS ruling since the flat Section 122 surcharge replaces country-specific IEEPA rates that were far higher. However, the US has already initiated Section 301 investigations into Brazil and China that opens the door to retaliatory tariffs or other trade restrictions.
A key risk from the SCOTUS ruling against IEEPA-based tariffs is a potential further deterioration in US fiscal credibility. The Committee for a Responsible Federal Budget (CFRB) estimates the Court's decision will reduce revenues by $1.9 trillion through 2036 and increase debt by $2.4 trillion over the same period, assuming past tariffs are refunded. As of February 20, the government collected at least $160 billion of IEEPA tariff payments from US importers. Although alternative measures may cushion the hit to customs revenue, the ruling curbs executive trade flexibility, and creates uncertainty over the durability of future revenue actions.
In parallel, trade friction risk worsening. US Trade Representative Jamieson Greer stressed “we are confident that all trade agreements negotiated by President Trump will remain in effect.” But as Bloomberg news points out, the European Parliament’s trade chief said he’ll propose freezing the EU’s ratification of a trade deal with the US until the Trump administration clarifies its policy. Officials in India cited similar reasons for postponing talks in the US this week on finalizing an interim trade deal.
Weekly Data Dump: No Game-Changer for Rate Bets
This week’s G10 economic data releases are unlikely to shift the dial on major central banks interest rate expectations. As such, we see limited volatility in currency markets.
US: ADP weekly employment change for the four weeks ending February 7 (Tuesday), February Conference Board Consumer Confidence Index (Tuesday), weekly initial jobless claims (Thursday), and January PPI (Friday). Bottom line: Fed can afford to be patient before resuming easing.
Canada: Q4 GDP (Friday). The Bank of Canada (BOC) estimates real GDP growth to stall in Q4 after rising 2.6% SAAR in Q3 because of inventory destocking. Bottom line: BOC is in no rush to raise rates.
Australia: January CPI (Tuesday). The RBA expects inflation to remain above the 2-3% target for some time. Specifically, the RBA projects the policy-relevant trimmed mean CPI at 3.7% y/y by June and 3.2% y/y by December 2026 before easing back under 3% over 2027. Bottom line: RBA has room to deliver to more rate hikes.
Other notable economic data due this week include: Germany February IFO Business Climate index (Monday), Japan February Tokyo CPI (Thursday), New Zealand February ANZ business and consumer confidence indexes (Thursday), and regional EU harmonized February CPI (Friday).
Beyond this week we remain cyclical neutral USD because the currency is trading in line with rate differentials. Structurally, we are bearish USD because of fading confidence in US trade and security policy, worsening US fiscal credibility, and the politicization of the Fed. The risk is the structural drags on USD outweigh the neutral cyclical USD backdrop and pull USD lower and further away from rate differentials, like it did in Q2 last year.
Watching Iran
On February 19, President Donald Trump indicated that Iran has roughly “10 to 15 days” to make progress toward a nuclear agreement or “bad things will happen.” In the meantime, the US has amassed a vast military force in the Middle East described as the largest presence since the lead-up to the 2003 invasion of Iraq
A military strategy expert at the Center for a New American Security noted “this is such a massive build-up that it almost speaks to the fact that there needs to be strikes, or else this is going to be one of the costliest bluffs in US history.” The prospect of a war between the US and Iran pushed crude oil prices to near six-month highs on fears of disruption in the Strait of Hormuz, where nearly 20% of global oil shipments pass through.
However, investors should lean against overshoots in crude oil prices as global oil production continues to outpace global demand. The EIA projects world crude oil output at about 107.7 million barrels per day in 2026 vs. consumption around 104.8 million barrels per day.
