Our January switch to USD weakness has worked well. The USD models are more neutral now. US tariffs have had a mixed USD reaction to the various currencies. The other country’s response and context matters.
FX Market and Strategy
Our FX systems switched to a short USD bias at the start of the year (against a general consensus for a stronger USD). There have been some bounces in the USD but it has been generally weaker in 2025, making it an excellent call.
Interestingly, C8 Hedge has a more balanced view on the USD in March. In particular, the models became more negative CAD and CHF against the USD, with a less positive view on GBP and SEK pairs. So far so good, with CAD underperforming, after Canada took a combatative approach to US trade tariffs, whilst for GBP, the UK economic outlook has weakened.
As we noted last month, US tariff announcements remain centre stage as the key event risk, with higher trade tariffs announced through February and March. But there are also increasing concerns about US growth as tariffs, public sector layoffs and illegal migrant deportations impact the economy.
In contrast, the US’s faltering support for NATO is leading to a sharp fiscal response in the EU, not least in Germany, where their longstanding ‘debt brake’ will exclude a sharp increase in defence spending. This is being matched elsewhere in Europe.
However, after a strong move higher in EURUSD, for example, we note that our signals are becoming more neutral, indicating that further upside may be limited.
Currency Focus: President Trump and Tariffs
There have been differing responses to the Trump tariff barrage with Canada and the EU taking an aggressive response whereas Mexico, UK and China have been more conciliatory.
However, the currency reaction has not been straightforward with CAD weakening (as the Canadian economy is closely tied to the US) whereas the EUR has been a beneficiary, due to a boost to the EU economy from higher defence spending. In contrast to Canada, the Mexican tariff negotiations have allowed the MXN to regain lost ground.
This EUR v CAD reaction illustrates that the currency impact of US tariff announcements is not as simple as it might first appear, so must be viewed within the overall currency outlook.
One of the best guides to this tariff war is the Atlantic Council Tariff Tracker:
https://www.atlanticcouncil.org/programs/geoeconomics-center/trump-tariff-tracker/
