What happened in May?
Trade war fears fall – and rise
After a turbulent April on the money markets driven by President Trump’s “liberation day” tariff announcement, May was on course to be the calm after the storm.
- The US and China agreed to a 90-day pause in the tariffs announced in April.
- The US and UK reached general terms for a trade deal to shield key UK industries.
- Markets responded positively to signs of a softer US trade stance.
However, it didn’t last. Fears of a transatlantic trade war resurfaced after Trump announced 50% tariffs on eurozone imports, initially set for 1 June and now delayed to 9 July. While the EU is open to talks, it remains firm on key issues.
Interest rate policy makers face a balancing act
UK data brought mixed signals in May:
- Consumer confidence and retail sales rose
- The Bank of England cut rates to 4.25% from 4.5%, with two more cuts expected this year
- Despite this, inflation was announced to have ticked up to 3.5% in April
What to watch in June and beyond?
On-again off-again tariffs likely to drive FX volatility
The next few weeks will see foreign exchange markets reflect the fallout from Trump’s latest tariff threat – a 50% levy on all imports from the eurozone, though implementation has now been paused until 9 July.
Trump’s EU tariff threats have reignited trade war fears. However, the tariffs have been paused until 9 July to allow for negotiations.
FX markets reacted quickly, with the dollar trending downwards, and further volatility is likely. The euro hit its highest level against the dollar since April after the pause was announced.
Central banks face an interest rate balancing act as tariffs threaten both the return of inflationary pressures and economic slowdown.
Turbulence ahead
The return of trade war fears is likely to create significant volatility in money markets over the coming weeks.
The dollar was already sliding against major currencies in the wake of Trump’s announcement, suggesting FX markets are concerned by potential EU retaliation and the impact of tariffs on the US economy. Investors are also concerned by Washington’s tax cutting and spending commitments.
Key pressure points include:
- The dollar has lost over 9% of value against the euro so far in 2025
- Around 8% decline against the pound
- European currencies showing resilience amidst the volatility
- With the latest tariff shock, further retreats for the greenback could be ahead.
For businesses with FX exposure, a close eye on upcoming developments is crucial.
Will negotiations be successful? What if they aren’t? With Trump, it’s impossible to be sure of anything. What we do know is that, in the face of uncertainty, import/export costs can fluctuate widely. This may be a timely moment to review FX hedging strategies with a view to protecting margins.
Euro/pound pairing is one to watch
All eyes are on the impact of the latest tariff threat on the euro/pound exchange rate. By striking a deal with the US, the UK has taken itself out of Trump’s firing line, at least for now. At the same time, the euro is regarded as a more robust safe haven. The euro is currently slipping slightly against sterling and has lost around 1.3% of value in the last year.
It’s certainly one to watch for UK businesses with cross-border interests in the eurozone.
The takeaway?
Overall, the month ahead could be highly volatile. Of course, a deal may be struck between the EU and US that removes the latest tariff threat altogether, and investors will be watching for hints that negotiations are progressing smoothly – or falling apart. But just the threat of a transatlantic trade war is enough to send a new wave of uncertainty through money markets that were already skittish.
As summer begins, Trump’s on-again off-again tariff policy remains the talk of the FX universe.
