Any expectations that the end of the 90-day US tariff pause on 9 July would provide final clarity on American trade policy have been dispelled by a flurry of announcements of new pauses, pullbacks and extensions.
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Stock and bond markets have been unmoved by the drama, perhaps because for them, what matters now is ascertaining the economic impact of any US import tariffs rather than trying to make sense of the administration’s negotiating tactics.
The markets’ view appears to be that framework agreements on trade will be reached and/or the deadlines will be extended to allow for negotiations that ultimately maintain the current 10% ‘baseline’ tariff and sector-specific levies, but avoid reinstating the higher tariff rates US President Donald Trump announced on 2 April, his so-called Liberation Day.
If this interpretation is correct, the markets will be more sensitive to signs of the economic impact from the tariffs – particularly US inflation data – than to further announcements on trade policy.
Given the unpredictability of President Trump’s negotiation tactics, risks may be skewed towards a worse-than-expected outcome, the main risk being a reimposition of severe ‘reciprocal’ US tariffs. However, markets will likely need to see that such measures are sustained over time before they react meaningfully.
No impact so far on the US labour market
The non-farm payroll report for June showed a surprisingly strong US labour market with 147,000 jobs created in June compared to consensus forecasts for around 106,000. In addition, there were upwards revisions to the numbers for prior months. The unemployment rate dropped to 4.1% despite market expectations for a rise to 4.3%.
One surprise in the report was the significant increase in government hiring (up 73,000 – half the total). Over the last three months, private hiring has averaged 115,000, which is not that much lower than the pace over the previous 12 months of 122,000.
Markets reacted to this reassuring employment data by lowering to around 5% the probability of an interest rate cut by the Federal Reserve at its next monetary policy meeting on 29-30 July. With no policy meeting in August, the Fed will now have the summer to further assess the impact of tariffs on the US economy.
Disinflationary clouds on the horizon in Europe
The main data release in the eurozone was the harmonised indices of consumers prices (HICP) on 1 July. As expected, headline inflation increased slightly to 2%. Data for core inflation was stable at 2.3%. Overall, the print was much as expected.
At its latest monetary policy meeting, the European Central Bank revised down its forecasts for headline inflation in 2026 from 1.9% to 1.6%, below its policy target of 2%.
Over the last month, there has been a rise in disinflationary forces impacting the eurozone economy. These include an increase in imports from China, reflecting overcapacity in the country. There are concerns that deflationary pressure is becoming endemic across Chinese industry.
China’s President Xi Jinping last week warned against ‘disorderly’ price competition, and state and Communist party media have stepped up calls against what they call ‘involution’, or destructive price wars. With access to the US market increasingly restricted by tariffs on Chinese exporters, Europe may find itself confronted with a wave of cheap Chinese goods driving down prices, abetted by the strength of the euro.
US dollar, our currency, your problem
The US dollar was weak in the first half of 2025. President Trump’s stop-start tariff war, investor concerns over the US government’s sizeable borrowing needs, and worries about the continued independence of the Federal Reserve have increasingly led overseas investors to hedge their exposure to dollars, contributing to its depreciation against other currencies.
Has the euro strengthened too much ?
The euro has risen by around 14% against the dollar so far in 2025, reaching its highest level in nearly four years.
At the ECB’s three-day annual conference in Sintra, Portugal, last week, ECB vice-president Luis de Guindos talked about the need to ‘avoid any sort of overshooting’ of the euro’s exchange rate. He said the ECB could look past the current exchange rate of around $1.18, but levels beyond $1.20 ‘would be much more complicated’.
The strength of the euro is making imports cheaper, while raising the prices of eurozone exports. This dynamic may have potentially significant disinflationary consequences for the eurozone economy, above and beyond the outcome of tariff negotiations.
In June, ECB president Christine Lagarde said the central bank had ‘nearly concluded’ the latest monetary policy cycle, which has seen policy rates fall from a peak of 4% in June 2024 to 2%. No rate cut is expected at the policy meeting on 24 July before the ECB’s summer break in August.
We anticipate the ECB will cut policy rates further this year to counteract disinflationary forces.
