Weekly Global Macro FX Insights – William Lun

EUR/USD: Max Pain in Q2

The last post covered market desensitisation to short term tariff risks. USD looks softer this week. Despite this, taking a larger time horizon, with significant tariffs expected in Q2, market assumptions about peak trade pressure remain intact. The dollar should strengthen into Q2, making the current USD dip more of a correction rather than the start of a sustained downtrend. 

• The EUR/USD correction could extend to the 1.0535-1.0575 range, but will probably be the limit before further downside.
• I wouldn’t be surprised if EUR/USD presses towards parity in Q2, reflecting heightened trade tensions and a stronger USD backdrop.
• Thesis risk: If Trump’s tariffs are less aggressive than expected and US employment weakens, the Fed could deliver three rate cuts this year, softening the dollar outlook.

USD/JPY: Policy Shifts

An interesting story running counter to broader non-USD weakness is Japan. USD/JPY has turned lower, primarily driven by the BOJ’s tightening cycle. With the policy rate now at 0.50%, expectations are for two more 25bp hikes in May and October as wage growth supports the inflation cycle.

• Japan’s strong wage hikes are reinforcing the BoJ’s confidence that higher wages will support consumption and inflation.
• Japan aims to avoid Trump’s tariffs as it did in 2018-19, but its large trade surplus remains a risk. Increased US LNG purchases from Japan will likely be a key negotiating tool and is a likely commitment.
• Trump and Bessent have made it no secret that they prefer a weaker dollar. If such a stance becomes more formalised, USD/JPY would lead lower as markets adjust to the shift.