Trade uncertainty returned as President Trump’s threat to hit foreign drugmakers with huge tariffs made money markets jittery
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Tariffs can be inflationary, which can move money markets as investors look for safe haven assets. They can also undermine global trade, which impacts exchange rates.
Tariffs were back on the agenda last week as President Trump announced sweeping levies on pharmaceuticals, heavy duty trucks and kitchen and bathroom cabinets. Tariffs of 100% on imported branded drugs, 50% on cabinets and 25% on trucks are slated to come into effect on Wednesday (1 October). The levies could be passed onto consumers in higher prices, driving inflation.
How the new tariffs align with previously agreed trade deals, particularly between the US and EU and the US and UK, was not immediately clear. The EU believed that it had negotiated a 15% ceiling on pharmaceutical tariffs, though whether that will be honoured has yet to be seen. For his part, Trump said he would exempt those manufacturers who are making new investments in US production facilities.
The situation remains hazy and the confusion may be damaging to trade and investment strategies, but the impact has yet to feed through into money markets. The euro is ending September largely where it started, up around 4.8% against the dollar over the last 12 months. The pound slipped to a seven-year low before rallying a little against the greenback later in the week.
UK economic activity remains a concern
Sterling weakened last week after softer UK survey data and slower services growth, especially when compared with more positive releases in the Eurozone and US. With the highest inflation in the G7, the Bank of England face a battle on both fronts.
Coming up:
This week focus will turn to inflation data across the eurozone, which could lead to exchange rate volatility. Inflation figures in Spain (Monday), France and Germany (both Tuesday) will highlight the state of the EU economy and help to dictate the European Central Bank’s interest rate strategy for the rest of 2025. In the US, all eyes will turn to labour market data (Friday), with payroll and unemployment figures weighing heavily on the Federal Reserve’s own monetary easing strategy.
