Uncertainty around trade policy persists as the 9 July deadline for the 90-day tariff pause looms. So far there have been few deals, with a formal agreement signed only with the UK. The US and China agreed to work toward normalizing trade relations, and President Trump posted details of a deal with Vietnam. We see lots of headline noise in to the event of 9th July but eventually US might see a trade deal with it's major trade partners such as EU & Japan. There are 3 scenarios broadly. Base case scenario (60% probability) is extension of status quo, more negotiations and continuation of 10% tariffs on major trade partners. This implies a modest risk on globally with rates slightly higher & DXY further lower. EM FX appreciate further. Bull case scenario (10% probability) sees Trump reducing base rates of tariffs & almost all major trade deals announced giving significant certainty. US rates lower because of increased rate cut expectations as inflation expectations go down, DXY lower, EM FX sharp appreciation & globally major risk on. Bear case scenario (30% probability) sees Trump implementing higher tariffs on most of US significant trade partners including EU & Japan. DXY sharply higher due to lower EUR & JPY & US rates higher along with significant risk off globally. Actual announcements may be more complex than the scenarios above. Given the complexity of the issues involved – tariffs rates, product scopes, carve-outs, negotiation timelines, etc. – it is difficult to spell out every single possible combination. But beyond the tariffs, the ongoing diversification from previous USD overweight (or increase of FX hedges) may continue, and the market will continue focusing on US data to assess the probability of Fed cuts. These may limit the degree of upside moves in USD or US rates.
