Tariffs no longer scare the markets

EUR/JPY

Key zone: 185.00 - 186.00

Buy: 186.50 (on a pullback following a retest of 186.00); target 187.50-188.20; StopLoss 185.80

Sell: 185.00 (on strong negative fundamentals) ; target 183.50; StopLoss 185.70

Just a year ago, any announcement of new U.S. import tariffs could reshape conditions across virtually all global financial markets within a matter of hours. Today, investors' reaction has become significantly calmer. The foreign exchange market has changed its priorities: for the EUR, GBP, and JPY, inflation, Federal Reserve policy, oil prices, and geopolitical tensions have become the key drivers, while tariff policy has gradually moved into the background.

However, it is precisely the combination of these factors that could generate the next major market move.

Let's recall:

Following the U.S. Supreme Court's decision limiting the scope of broad import tariffs, the Trump administration introduced a temporary 150-day import duty in February 2026 under Section 122 of the Trade Act. The measure expires at the end of July, after which the White House intends to replace the temporary mechanism with a new system of long-term tariffs covering virtually all U.S. imports.

This represents one of the most significant changes in U.S. trade policy in recent years. The new tariffs could potentially affect about 99% of the country's foreign trade. Rates for most countries are expected to range between 10% and 12.5%, while certain product categories will face even higher duties.

The baseline 10% tariff applies to roughly a dozen trading partners, including the European Union, Canada, and Mexico. The higher 12.5% tariff will affect several dozen countries, including China, India, Japan, and South Korea.

Despite the possibility of isolated surprises, markets are increasingly leaning toward the view that the new version of the tariff policy will prove considerably milder than originally expected. As a result, the likelihood of a broad-based reaction across financial markets remains limited.

The situation looked very different in the spring of 2025. At that time, market participants primarily viewed import tariffs as a source of accelerating inflation. U.S. Treasury yields were rising, the U.S. dollar was strengthening, and expectations of imminent Federal Reserve rate cuts had virtually disappeared.

However, just a few weeks later, investors began to reassess the situation.

• Experience has shown that a significant share of the tariff burden falls not on foreign manufacturers, but on U.S. importers and end consumers.
• Higher import costs gradually reduce consumer spending, weaken corporate financial performance, and weigh on economic growth.
• Markets have begun to view broad tariffs not only as an inflationary factor but also as a potential source of slower economic growth. The greater the pressure on economic activity, the higher the probability that the Federal Reserve will eventually be forced to adopt a more accommodative monetary policy.

Against this backdrop, investors are once again shifting their focus to other key drivers:

• Geopolitical tensions remain the primary source of risk. Any threat to oil shipments through the Strait of Hormuz automatically increases the risk premium embedded in crude oil prices.
• Brent crude remains well above its long-term average levels. Every additional $10 per barrel has the potential to add approximately 0.2–0.4 percentage points to inflation in developed economies over the course of several quarters. That is why developments in the Middle East are capable of triggering a much stronger market reaction than another round of tariff initiatives.
• At the same time, the euro continues to receive support from fundamental factors. Economic expectations in Germany are gradually improving thanks to anticipated large-scale fiscal investment, expanding infrastructure projects, and the tax reforms proposed by Friedrich Merz's government.

What does this mean in practice?

The market has gradually stopped viewing trade tariffs as its primary source of risk.

The European Central Bank believes that further monetary easing may proceed much more slowly than was expected just a few months ago. If inflation in the euro area remains close to the target level and Germany's economy continues its gradual recovery, the interest rate differential between the United States and Europe may stop widening.

For now, however, the market remains in a wait-and-see mode. Until new U.S. inflation data, labor market figures, and subsequent comments from Federal Reserve officials are released, consolidation across the major currency pairs remains the most likely scenario.

If the new U.S. tariff policy proves substantially more restrictive than current market expectations, the initial reaction across all currency pairs could trigger a sharp surge in volatility. However, the subsequent market direction will be determined not by the tariffs themselves, but by the extent to which they alter investors' expectations regarding inflation and future Federal Reserve policy decisions.

So we act wisely and avoid unnecessary risks.

Profits to y’all!