FX Talking: Silver Linings Playbook

At the same time, European equities are outpacing those in the US as eurozone data marginally beats consensus. It seems only a matter of some better confidence coming through to unlock spending from European businesses and consumers alike. Yet, sadly, we think it too early to conclude that Washington is merely using tariffs for transactional purposes. Instead, our house view is that maximum tariff pressure hits in the second quarter.

What this means is that it is too early to call a top in the dollar. In fact, we now think EUR/USD could trade close to parity in the second quarter on broader tariffs and short term differentials staying wide as the European Central Bank possibly takes rates below 2.00%. Yet the real trade-weighted dollar is already back to levels last seen in 1985 and strength this summer should be an opportunity to increase dollar hedge ratios for the next two to three years.

Elsewhere, we think sterling could come under pressure over coming months as the UK shifts to a setting of tighter fiscal and looser monetary policy. We doubt GBP/USD sustains any gains over the 1.25/26 area. Equally, the threat of a global tariff war makes it premature to expect much of a recovery in commodity or EM currencies.

The wild card could be Washington seeking a weaker dollar. But that’s probably a 2026 story once the US has secured more leverage over its trading partners with higher tariffs.