Tariff deadline day came in like a wrecking ball for global risk sentiment and gave more legs to the US Dollar (USD) rebound to further challenge consensus positions, Scotiabank's Chief FX Strategists Shaun Osborne and Eric Theoret report.

Deadline day tariff increases prompt equity drop

"Broadly, the 10% baseline tariff remains but a 15% rate applies to many countries and others will face much stiffer levies—39% for Switzerland and 35% on some Canadian exports. There is an asterisk against these rates as they come into force August 7th which gives countries another week to reach an 11th hour deal. The average US tariff was just under 13% prior to these latest developments and will rise a little from that point as a result. Tariffs will slow consumption and lift prices in the US but a likely decline in trade will slow the global economy."

"Markets have had a lot to digest over month-end. The Fed held rates, as expected, and gave little away on the outlook for policy through September. Dovish dissent from two governors was not unexpected, but is unusual and may herald a deeper split among policymakers ahead. US economic data reflected higher than expected (core PCE) prices and some signs that despite stronger than expected headline Q2 GDP data, underlying demand is slowing (weakest real final sales since late 2022 at +1.2% SAAR)."

"The outlook may get a little murkier today with the NFP expected to rise 105K, below recent trend gains and getting dangerously close to the 100k increase in employment needed to keep pace with population growth (and avoid upward pressure on the unemployment rate). Soft data may rekindle September Fed easing bets and weigh on the dollar somewhat but, as it stands, July is in the book with a solid overall gain in the DXY—one that is strong enough on the charts to suggest that the dollar’s broader correction from its very weak H1 performance can extend a bit more. Trade deals eased some of the USD’s risk premium but fundamental challenges (fiscal, monetary policy) remain significant and that should limit the dollar’s powers of recovery ahead."