What will drive FX rates - Tariffs or Mar-o-Lago accord?

Trump’s tariffs arrive today (in Canada and Mexico at least), and while U.S. equities dipped slightly yesterday, the resilient U.S. Dollar remains firmly within its recent range against the Pound Sterling and, to some extent, the Euro. So, how should your finance and treasury teams approach foreign exchange rates in light of these developments?

The past few weeks have underscored how unpredictable currency markets can be as they respond to a whirlwind of news and surprises. One certainty is that volatility has returned, and geopolitics - led by Trump - continues to steer the market narrative. Just a month ago, markets were focused on whether Trump would impose tariffs on specific countries, which typically strengthens the U.S. Dollar. Now, however, attention is shifting. Markets are weighing the potential impact of increased defence spending by Europe and the UK, with currencies and stock markets responding optimistically, at least for now.

Yet, the question remains: how sustainable is the recent strength of the Pound Sterling and the Euro? If the primary driver of this uptick is the prospect of Europe and the UK increasing their support for Ukraine, this outlook may not bode well for European assets in the long term. 

Another explanation could be that Trump’s tariffs are no longer the primary focus. Markets often “buy the rumour and sell the fact,” and attention may now be turning to what lies ahead. Trump has frequently hinted at using currency as a policy tool, leading to speculation on Wall Street about the so-called “Mar-a-Lago Accord.” This hypothetical scenario would involve the U.S. pressuring its global partners to accept a weaker U.S. Dollar and lower Treasury borrowing costs. While this idea may still seem far-fetched, its potential market impact would be significant. If markets begin to price in even a small likelihood of such a policy, this could contribute to further U.S. Dollar weakness.

For finance teams that could ignore currency fluctuations in recent years, now is the time to reassess risk management strategies. Reviewing your objectives and processes has never been more critical in this period of heightened uncertainty. Need help getting started? Visit our free FX & Treasury Academy.