Global FX Strategy_FX Compass_ EUR still underpricing tariff risk

Summary of Key Points from the Conference Call Industry Overview - The conference call primarily discusses the Global Foreign Exchange (FX) Market and the implications of US tariffs on various currencies, particularly the EUR, CAD, and GBP [3][8][25]. Core Insights and Arguments 1. US Tariff Announcements: The US announced a 25% tariff on imports from Canada and Mexico and a 10% tariff on China, which initially caused a spike in the USD but was later unwound due to a one-month delay in tariff implementation [3][8]. 2. Market Sentiment: There is a prevailing market consensus that the US will primarily use tariffs as a negotiating tool, leading to a limited lasting impact on the broad USD and implied FX volatility [4][9]. 3. Inflationary Risks: US inflation breakevens are rising, indicating that the market is pricing in inflationary risks associated with tariffs, despite falling oil prices [4][10]. 4. EUR Underpricing Tariff Risk: The EUR is perceived to be underpricing the risk of tariffs, with short-dated implied EUR/USD volatility trading below realized volatility, suggesting a market expectation of normalization rather than turbulence [5][16]. 5. Political Uncertainty in Europe: Domestic political risks in Europe are skewed towards less favorable outcomes for the EUR, particularly with upcoming elections in Germany and ongoing political tensions in France [17][22]. 6. CAD and USDCAD Dynamics: The USDCAD currency pair has been volatile due to tariff announcements, with a key level identified at 1.48. The market is advised to buy dips near 1.41, reflecting a broader bullish view on the USD [28][30]. 7. GBP Outlook: The GBP has been one of the few currencies benefiting from US tariff risks, but it remains the weakest performer in G10 currencies year-to-date. The upcoming BoE rate decision is expected to result in a 25 basis point cut [25][26][27]. Additional Important Content - Economic Data Impact: Recent US economic data has been mixed, with strong manufacturing data contrasted by weak job openings, contributing to uncertainty in the growth outlook [20][24]. - Future Tariff Deadlines: Key upcoming dates include the 30-day tariff delay deadline on March 4 and the Liberal leadership contest on March 9, which could significantly impact market expectations [32][35]. - FX Trade Recommendations: The report includes various FX trade recommendations, such as being short EUR/JPY and long EUR/USD volatility swaps, reflecting the analysts' views on market positioning [37]. This summary encapsulates the critical insights and implications discussed in the conference call, focusing on the FX market's response to US tariffs and the broader economic landscape.