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• Trump’s reciprocal tariffs could spur more chaos.
• US jobs report might show DOGE impact on labour market.
• Eurozone inflation will be vital for ECB bets as April cut uncertain.
• RBA to likely hold rates; Canadian jobs, BoJ Tankan survey also on tap.

Markets brace for reciprocal tariffs

There’s a sense of both optimism and fear as we approach the April 2 deadline of when the Trump administration will detail the much talked-about reciprocal tariffs. All indications are that the White House will primarily target the countries with which the US has the biggest trade imbalances, thought to cover 15% of America’s trading partners. Hence, they’ve been dubbed as the ‘Dirty 15’ and include China, the EU, Mexico and South Korea among others.

Negotiations are already underway with several countries to find a middle ground so if Trump shows leniency, a relief rally could ensue. However, if the announcement contains very few exemptions and markets are left disappointed, shares on Wall Street could resume their selloff.

It’s also possible that Trump might unveil further sectoral tariffs, such as for pharmaceuticals. Risk appetite would struggle to get far in such a scenario.

NFP slowdown could fuel recession fears

Worries about the US economy stumbling amid the Trump administration’s radical policies have so far proved unfounded, but next week’s nonfarm payrolls report could change that. The Department of Government Efficiency (DOGE) has been busy laying off federal workers since its inception after Donald Trump’s election victory.

Those job cuts will likely start to come through in the March payroll figures. At the same time, many businesses have turned more cautious with their hiring plans, especially in the manufacturing sector, as President Trump’s erratic decisions on tariffs are generating a lot of uncertainty about the economic outlook.

Fed Chair Powell insists that the US labour market remains “in balance”. Nevertheless, the risks are clearly tilted to the downside and so there is some anxiety about Friday’s jobs data. After a gain of 151k in February, nonfarm payrolls are expected to have increased by 128k in March.

The change in government and private payrolls will be watched very closely to gauge the scale of potential DOGE layoffs and to what extent these will be replenished by the private sector.

The unemployment rate is projected to tick up slightly to 4.2%, while average hourly earnings are forecast to have risen by 0.3% m/m.

Any cooldown in the labor market that’s a lot greater than what’s anticipated could bolster Fed rate cut expectations. The Fed has yet to budge on its wait-and-see stance despite the few cracks that have started to appear in the economy.

Will the data support the Dollar’s rebound?

However, the market reaction will likely be influenced by the tone set by the ISM PMIs that will be published in the preceding days. The ISM manufacturing PMI is out on Tuesday and is expected to stay unchanged at 50.3. The ISM services PMI will follow on Thursday and that’s forecast to dip slightly from 53.5 to 53.0.

Other releases include the Chicago PMI on Monday, the JOLTS job openings on Tuesday, the ADP employment report and factory orders on Wednesday, and Challenger Layoffs on Thursday.

The US dollar has been in recovery mode over the past couple of weeks but should the incoming data point to a weakening economic backdrop, it’s likely to face some renewed selling pressure, particularly if investors price in a strong probability of a third rate cut this year.

A major risk for the markets is if any poor numbers are accompanied by a spike in the ISM survey’s price indices, which would indicate a stagflationary environment. It would be tough for Wall Street to find much support from aggressive rate cut bets under such conditions.

Eurozone CPI eyed as tariffs boost ECB cut bets

Policymakers from the European Central Bank have hinted at the possibility of a pause in rate cuts at the April meeting, but the decision looks set to be a close one as the case for caution has weakened after Trump’s decision to impose 25% tariffs on all auto imports into the United States as of April 2.

The latest levies, which include imports of all automobile parts, are likely to hit European economies hard as the continent is a major exporter of cars and related parts to the US. Investors seem to think that the ECB will have little choice but to lower rates again when it meets on April 17 to cushion the Eurozone economy from Trump’s trade tirade and are pricing in about a 90% probability of a 25-basis-point reduction.

If Tuesday’s flash CPI estimates for March show another decline in the inflation readings, the euro will be in danger of deepening its recent pullback against the US dollar. The Eurozone’s headline CPI rate fell to 2.3% y/y in February, ending four months of increases. Core measures have also moderated. But if there’s a reversal of this trend, rate cut expectations could be pared back, lifting the euro.

The account of the ECB’s March meeting might offer further clues about the next gathering when it’s published on Thursday.

RBA to hold rates amid trade frictions

A central bank that’s almost certain to keep interest rates unchanged at its next meeting is the Reserve Bank of Australia. Having been late to the game, the RBA trimmed its cash rate in its previous decision in February but is not expected to cut again until July. However, the escalating trade war, which China is at the centre of, makes it more likely that the RBA will cut rates sooner rather than later.

Moreover, with inflation in Australia easing slightly in February and employment unexpectedly falling, policymakers may not sound quite as hawkish as they did in February.

Should the RBA open the door to a rate cut at its May meeting, the Australian dollar could reverse lower, although it’s so far been able to hold above its short-term uptrend line despite the heightened trade frictions.

PMI numbers out of China will also be important for the aussie and may offer some support if they signal an improvement in manufacturing activity as forecast. The government’s own manufacturing PMI is due on Monday, while the equivalent PMI from S&P Global/Caixin is out on Tuesday.

Tariffs complicate BoC’s rate cut path

The Canadian dollar has also been on a somewhat steadier footing lately, even though Canada has come under Trump’s direct firing line. The Bank of Canada has not been shy about expressing its concerns about the negative impact of the trade war on the economy. However, although the BoC cut rates by a further 25bps earlier this month, citing tariff risks, Governor Tiff Macklem acknowledged that the risks to inflation have gone up too.

This potentially limits the scope of additional easing and investors see just two more 25-bps rate cuts for the rest of the year. Those odds could increase, however, if the Canadian economy were to take a sudden turn for the worse.

Traders will therefore be keeping a close eye on Friday’s employment data for any signs about a slowing labour market.

Yen slides as tariffs throw BoJ hikes into doubt

The Japanese yen hasn’t been able to garner much safe-haven bids during the latest wave of tariff headlines. Investors think that Trump’s sectoral and reciprocal tariffs will hurt Japanese growth, making it more difficult for the Bank of Japan to hike interest rates again later this year.

The Bank’s own Tankan business survey that’s conducted quarterly should shed some light on Tuesday as to whether Japanese businesses are becoming less optimistic about the outlook and reducing their capital expenditure plans on the back of the growing trade turmoil.

Preliminary industrial output figures for February are also due on Tuesday, while household spending data will be released on Friday.

The yen could halt its recent slide against its major peers if the data calms jitters about significant damage to the Japanese economy from Trump’s protectionist policies.

The Fed’s preferred indicator of US inflation, the core index of personal consumption expenditure, accelerated from 2.6% to 2.8% in February. This is above the expected 2.7%, confirming that it is too early to see a sustained downward trend in prices.

At the same time, we note the second month of acceleration in income growth, which added 0.8% in February after a 0.7% increase in January. Total spending rose by 0.6% after a contraction of 0.4% earlier. As a result, Americans’ personal savings exceeded 4.6%, approaching the norm. The savings rate was mostly above 5% from 2013 to 2022. The rate only went below it during the inflationary surge of 2022 and between 2004 and 2008.

This is negative news for the US stock market, where worries around tariffs are crushing recovery attempts. These bearish sentiments are reinforced by the technical picture, which has seen sellers retake the lead as the major US equity indices have attempted to move back into territory above their 200-day moving averages. Temporarily, there is a positive correlation between the dollar and US equity indices due to speculation that a weak economy will intensify Fed rate cuts, regardless of inflation.

However, robust income growth and normalisation of the savings rate so far make it possible to dismiss the idea of a serious recession in the US soon.

Europe is switching to daylight saving time in the new week – don’t miss the changes in the trading schedule.

Among the key events on the 1st of April, we highlight the Reserve Bank of Australia’s decision. The rate is expected to remain at 4.1% after a cut in February. Inflation only ticked down last month, and GDP growth remains healthy, so it is hardly prudent to ease policy too sharply.

Also, on April 1st, the preliminary estimate of eurozone inflation will be released. Recent data showed a slowdown to 2.3% annually, and the new soft data will increase speculation about further ECB policy easing.

Oil traders’ attention is on the OPEC meeting on Thursday, April 3rd. As oil is rising, no changes are expected, but surprises cannot be ruled out, which could affect the price.

The main news on Friday will be the March US labour market data. The market has been adding below-trend rates for a couple of months, and a dip could be a new dose of negativity for the dollar.

The PMI reports showed contrasting trends between the US and the euro area in March. In the euro area, manufacturing PMI rose more than expected to 48.7 from 47.6, while the US index declined to 49.8 from 52.7. March marked the first time with the US index below 50 since last year, while the euro area manufacturing output subindex rose above 50 for the first time in two years, giving the first signs of an end to the manufacturing slump in Europe. In the services sector, the US recorded a very strong increase to 54.3 from 51.0 while the index in the euro area declined to 50.4. Hence, the reports sent mixed signals within each of the economies, and thereby likely not changing the views in the central banks much for the upcoming policy decisions.

Consumer confidence continued to slide in the US, with the Conference Board measure declining to 92.9 (cons: 94.0) as economic expectations reached the lowest level since 2013 and inflation expectations moved higher on the back of tariff announcements, like we saw in the Miching survey. Yet, at the same time the perception of labour market conditions remained unchanged, as did intension for major purchases, and the share of Americans planning a vacation even rose. So, while Americans are concerned about the future economic outlook, they are not changing their behaviour, yet it seems.

President Trump announced a 25% tariff increase on imports of foreign-made vehicles as well as car parts, which affects USD 286 bn worth of imports, scheduled to income into effect on April 2^nd. Together with the expansion of tariffs on Mexico and Canada, the effective average tariff rate could increase by another 5%-points to around 13%, which would weigh on US GDP by a total of 0.5% according to the tax foundation. The EU is expected to retaliate 1:1 to the US measures which risks a tit-for-tat trade war. For details, see Research US - Trump's 'Liberation Day' - what to expect?, 27 March.

In the euro area, we received March inflation data for two of the large economies, France and Italy. In both countries, inflation came in lower than expected. French inflation was unchanged at 0.9% y/y (consensus: 1.1% y/y) and Spanish inflation declined to 2.2% y/y (consensus: 2.5% y/y) from 2.9%. The lower-than-expected inflation prints support a rate cut from the ECB in April, which was also reflected in markets, that increased the likelihood of a cut, now pricing -21 bp from -19 before the prints. Based on the country data, we expect euro area inflation on Tuesday to decline to 2.1% y/y from 2.3% y/y.

Besides euro area inflation and Trump's tariff announcements, focus next week turns to the US jobs market report, ISM, and Chinese PMIs. We expect nonfarm payroll growth slowed down to just 110k (from 151k) amid federal layoffs and sharply slowing immigration. Also in the US, we look out for the ISM indexes next week to see if they mimic the PMI report. China releases the official PMI for both manufacturing as well as services for March. Consensus is for a small increase in both indices, but we see a good chance of an even bigger increase based on a strong pick-up in the high-frequency Yicai index, metal prices, as well as the Emerging Industries PMI for March. In Japan, focus turns to the Tankan business survey, where a strong report is a prerequisite for further BoJ hikes.

Full report in PDF.

EURUSD regained traction and rose above 1.08 handle in early US trading on Friday, as hotter than expected US inflation and higher consumer spending failed to impress traders, concerned about slower economic growth.

Fresh strength broke above the top of two-day congestion and generating initial basing and reversal signal after recent pullback from 1.0954 (Mar 18 top) was contained by strong support at 1.0727 (Fibo 38.2% of 1.0360/1.0954 / 200DMA).

This also points to scenario of a healthy correction of larger uptrend and overall bullish structure intact.

Technical studies on daily chart are about to return to full bullish setup as 14-d momentum is about to enter positive territory and moving averages are in bullish configuration and heading north.

Daily close above 1.0800/17 (round-figure / Fibo 38.2% of 1.0954/1.0732 bear-leg) will be required to keep fresh bullish structure intact for attack at 1.0843 (daily Tenkan-sen / 50% retracement) and 1.0869 (Fibo 61.8%) violation of which to confirm reversal.

Initial supports lay at 1.0800/1.0782 (round-figure / broken Fibo 23.6% and guard key support at 1.0727.

Res: 1.0843; 1.0869; 1.0902; 1.0954.
Sup: 1.0800; 1.0782; 1.0727; 1.0700.

Markets

Markets today stayed in a defensive wait-and-and see modus counting down to the long-awaited US announcement sweeping ‘reciprocal tariffs’ next Wednesday. In this context of elevated uncertainty, markets held to a ‘selective’, one-sided reading of incoming economic data. Softer than expected Spanish and French national inflation data were enough for European bond investors to further retrace from the EU reflation trade that dominated trading early this month. German yields decline further between 4.3 bps (2-y) and 5.3 bps (30-y). Even so, the 10-y EMU swap tested the key 2.625% area (Jan 2025 top/recent correction low), but for now this support did its job, blocking further intraday losses. This halt might at least partially have been inspired by (Bloomberg) headlines that the European Commission is working on a ‘term sheet of concessions’ to negotiate a potential trade agreement with the US. We likely will get plenty of this kind of messages on negotiating tactics in the run-up to next Wednesday. It probably tells at least as much on positioning in EMU interest rate markets after recent decline, than on the substance of the matter. At the same time, EMU money markets in the meantime discount about a 85% chance of the ECB further unwinding the policy restriction that is still left after 9 months of protracted easing. In the US, the spending and income data and the PCE deflators brought no unequivocal story either. February personal income was strong at 0.8% M/M, but spending slightly disappointed (0.4% M/M vs 0.5% expected). The headline PCE deflator was bang in line with expectations (0.3% M/M and 2.5% Y/Y). The core measure was marginally stronger at 0.4% M/M and 2.8% Y/Y. The final U. of Michigan consumer confidence release further confirmed the stagflationary narrative from the preliminary release. The consumer expectations confidence index was further downwardly revised to 52.6 (weakest since July 2022). At the same time, inflation expectations were upwardly revised (1-y 5.0%, 5-10 y 4.1%!), raising the risks of a de-anchoring of inflation expectations. It didn’t prevent further Treasuries’ gains in current low visibility environment. US yields decline between 6.0 bps (2-y) and 8.8 bps (10 & 30-y). Equity markets further turn into risk-off modus (S&P 500 -1.1%, EuroStoxx 50 -0.9%.

On FX markets, the dollar failed to hold on to initial gains (104.2). EUR/USD rebounded back above 1.08(1) on the EC tariff negation headlines and on rising US stagflation risks. Still this remains a fragile balance of USD weakness currently outweighing euro fragility. Sterling this morning temporarily profited from stronger than expected February retail sales. EUR/GBP tested the 0.8316 area, but sterling gains also could not be sustained (currently 0.835).

News & Views

Belgian inflation fell by 0.7% m/m to ease from 3.55% to 2.91% in March. Core inflation (excluding unprocessed food and energy products) declined from 3.10% to 2.71%. A range of subcategories all fell in y/y terms, including energy inflation (5.48% from 8.17%), rents (3.27% from 3.3%) and services inflation (3.88% from 4.34%). Food price inflation was the odd one out, accelerating to 2.45%, driven by fruit & sugar, chocolate and jam prices. The biggest decreasing effect came from motor fuels, clothing and plane tickets. The first inflation estimate by European (HICP) standards for Belgium amounts to 3.6%.

The ECB’s monthly survey showed consumer inflation expectations for the year ahead in February matching January’s 2.6%, as did those for the three-year ahead period at 2.4%. They thus remain below the perceived past inflation rate (3.1%, down from 3.4%). Consumers expect their nominal wages over the next 12 months to grow by 1%, a slight uptick from 0.9% in January. They turned more negative on the economy, seeing a 1.2% contraction in the year ahead, deepening from -1.1% in January. As a consequence, the unemployment rate 12 months from now rose from 10.4% to 10.5%. However, since this is about the same as the current perceived rate (10%), it implies a broadly stable labour market. In terms of housing and credit access, consumers expected the price of their home to increase by 3% over the next 12 months, unchanged from January. The net percentage of households reporting a tightening (relative to those reporting an easing) in access to credit over the previous 12 months declined, as did the net percentage of those expecting a tightening over the next 12 months.

Both personal income and spending rose in February. Personal income advanced by robust 0.8% month-over-month (m/m), which was stronger than consensus expectations for a 0.4% m/m gain.

Consumer spending increased by 0.4% on the month – an acceleration following a lackluster performance in January (revised to -0.3% m/m). Despite the rebound, February's outturn was softer than the market expectations for a 0.6% gain. With income outpacing spending last month, saving rate increased for the second consecutive month to 4.6% from 4.3% prior.

Most of the gain in spending was due to higher prices. In real terms (which excludes the impact of inflation) spending edged higher by just 0.1%. This tepid increase follows a -0.6% decline in January. Spending on goods rose 0.7%, with higher volumes of sale of both durable and non-durable items. Spending on services meanwhile edged down by 0.1% m/m.

Inflation heated up a bit. The Fed's preferred inflation metric, the core PCE price deflator, rose 0.4% m/m – a slight acceleration compared to 0.3% gain in January. In year-over-year terms, core PCE inflation rose to 2.8% from 2.7% in the prior month.

Key Implications

Income continued to rise strongly in February but spending gains disappointed. Real consumer spending remained little changed in February following a pullback in January. Although income and employment growth have so far remained resilient, soft indicators such as consumer confidence are pointing to increasingly nervous consumers, anxious about inflation and economic uncertainty. Given the soft start to the year and a hit to consumer confidence, we expect real consumer spending to lose steam in Q1, expanding by less than 0.5% (annualized), compared to 4.2% in fourth quarter of 2024.

Consumer confidence has fallen over the past four months, while one-year inflation expectations have surged to levels not seen since November 2022, when core PCE inflation exceeded 5% (compared to 2.8% now). Consumers have reasons to worry about prices. For example, tariffs on imported vehicles announced this week could raise the already-high vehicle prices by additional $5,000 on average (report). Spending at bars and restaurants has stagnated over the last three months, while the saving rate continued to edge higher in February, suggesting that consumers may already be cutting back on discretionary spending to conserve cash. This cautious approach may be warranted, as our latest forecast anticipates higher unemployment and inflation in the months ahead.

Canadian economic growth started 2025 on strong footing, growing by 0.4% month-on-month (m/m). This was a tick above Statistics Canada's and consensus expectations for a 0.3% m/m gain. In February, Statistics Canada estimates that the Canadian economy held flat.

January's reading was broad-based, with output expanding in 13 of 20 industries. Growth in goods industries (+1.1% m/m) led the charge, while the services sector advanced by a modest 0.1% m/m.

On the goods side, mining/quarrying/oil & gas contributed most to the gain, led by oil & gas extraction (2.6% m/m). Meanwhile, the manufacturing sector grew by 0.8% m/m after two consecutive months of declines, and utilities registered a solid 2.7% m/m. The construction industry is seeing some positive momentum, led by a 1.4% m/m gain in residential building construction.

On the services side, wholesale trade (0.8% m/m) and public admin (0.3% m/m) were the biggest contributors to overall growth. Offsetting some of the positive effects was a 0.9% m/m decline in retail trade as spending on motor vehicles and parts dropped by a sizeable 3.2% m/m.

Key Implications

Make no mistake, the economic momentum that started in the fourth-quarter has clearly carried into the early stages of 2025. With the information we have at hand, Q1-2025 growth is tracking around 2.0% and in line with the Bank of Canada's January MPR projections. Past this, the outlook is turbulent. There are clear downside risks to Canada's economy, especially as the threat of widespread tariffs seems imminent come April 2nd.

The BoC has its work cut out for them. Under reasonable assumptions, we would expect the Bank to cut its policy rate by 25 bps over their next two meetings to support economic growth ahead of a worsening trade conflict. That could change if the U.S. administration reverses course on their tariff plans, but it's something that appears unlikely at this point.

Daily Pivots: (S1) 1.0750; (P) 1.0786; (R1) 1.0837; More...

No change in EUR/USD's outlook and intraday bias stays neutral. Strong support is expected from 38.2% retracement of 1.0358 to 1.0953 at 1.0726 to complete the correction from 1.0953. On the upside, break of 1.0857 will bring retest of 1.0953 first. Firm break there will resume larger rise from 1.0176. However, sustained break of 1.0726 will bring deeper correction to 55 D EMA (now at 1.0637).

In the bigger picture, prior strong break of 55 W EMA (now at 1.0675) suggests that fall from 1.1274 (2024 high) has completed as a three wave correction to 1.0176. Rise from 0.9534 is still intact, and might be ready to resume. Decisive break of 1.1274 will target 100% projection of 0.9534 to 1.1274 from 1.0176 at 1.1916. Also, that will send EUR/USD through a multi-decade channel resistance will carries larger bullish implication. This will now be the favored case as long as 1.0531 resistance turned support holds.

Daily Pivots: (S1) 0.8818; (P) 0.8834; (R1) 0.8855; More…

Intraday bias in USD/CHF remains neutral for the moment. Consolidation from 0.8757 could extend. In case of stronger recovery, upside should be limited by 0.8911 support turned resistance. On the downside, break of 0.8757 will resume the fall from 0.9200 to 61.8% retracement of 0.8374 to 0.9200 at 0.8690. Sustained break there will pave the way back to 0.8374 support.

In the bigger picture, rejection by 0.9223 key resistance keep medium term outlook bearish. That is, larger fall from 1.0342 (2017 high) is not completed yet. Firm break of 0.8332 (2023 low) will confirm down trend resumption.