Tariff Fallout and Volatility Surge Define the Week Ahead
Article published on April 7th, 2025 3:10PM UK Time
Table of Contents
- Market Overview: Risk Reset and Cross-Asset Liquidation
- Focus Event: US CPI Amid Volatility, Tariff Fallout, and Fed Pushback
- FX Landscape: G8 Divergences and Policy Recalibrations
- Eurozone: Retaliation Escalates, Data Risks Mount
- Asia-Pacific: RBNZ Decision, Tariff Contagion, and China Watch
- North America: Canada Holds Line, Mexico in the Crosscurrents
- Trading Opportunities
1. Market Overview: Risk Reset and Cross-Asset Liquidation
The financial system is entering the week on the back foot after one of the most volatile stretches since the COVID shock. Cross-asset capitulation defined the prior week’s session, with broad liquidation across equities, commodities, and FX. US indices saw some of their steepest two-day drawdowns in over a decade, with hedge fund de-risking and margin calls reportedly hitting levels not seen since 2010.
The Nasdaq’s 22.5% drop from its highs and the S&P’s 18% decline now place both at or near technical bear market thresholds. This was not an isolated equity story. Bond yields collapsed under safe-haven demand, and commodities unwound violently. Oil plunged toward $60, copper fell nearly 20% from its recent high, and gold sold off in tandem with equities, defying its typical haven role due to margin-related position cuts.
Volatility surged, with the VIX jumping above 32.5. According to UBS and multiple historical analogs, the 35-level in the VIX remains a key threshold watched for tactical equity reallocation—Goldman Sachs and others highlight this as a potential short-term bounce trigger. However, this environment remains high-risk, and short-term volatility now works both ways—amplifying both declines and retracements.
Driving the stress was the formal implementation of US tariffs, referred to by market participants as “Liberation Day.” The tariff construct, criticized for its simplistic math (trade deficit divided by imports, then halved), was read as economically unorthodox and unpredictably applied. The result: widespread concern over the credibility and future direction of trade policy. With average tariffs around 25% globally and some nations receiving blanket 10% charges despite surpluses, markets are unable to model likely retaliation paths or economic effects with precision.
Retaliatory action has already begun: China reinstated 34% tariffs on US products, and Eurozone trade officials are expected to escalate responses this week. Market participants are in price discovery mode: uncertain about the terminal tariff structure, the lagged data impact, and the long-term sentiment damage to US products, which is already manifesting in shifting consumer preferences in retail markets such as Canada.
2. Focus Event: US CPI Amid Volatility, Tariff Fallout, and Fed Pushback
The dominant data release this week is the US CPI report (Thursday). Expectations are for headline y/y CPI to print at 2.8% and core CPI at 3.1%, unchanged from last month.
Fed Chair Powell’s remarks on Friday—emphasizing “no hurry” to cut rates—landed in stark contrast to market expectations, which now price over 125bps in cuts by year-end, with 50% odds for a May move. Powell noted that labor markets remain strong and inflation sticky, suggesting that any further easing will need more than just short-term volatility to justify action.
The inflation print will matter most if it surprises to the upside, as this would reinforce stagflation risks—growth down, inflation high, and policy constrained. A downside surprise may offer tactical relief, but any upside from weak inflation could be short-lived without fiscal de-escalation or credible trade negotiations.
The Atlanta Fed’s GDPNow model, unadjusted for gold trade distortions, currently estimates Q1 GDP at -2.8%; once adjusted, the figure improves to -0.8%, still far below Q4’s 3.0%. This softening, alongside NFP slowing and wage pressure moderation (per UniCredit’s March employment preview), reflects a labor market that is losing steam even before retaliatory tariffs fully register in corporate margins and hiring decisions.
3. FX Landscape: G8 Divergences and Policy Recalibrations
USD performance last week was nuanced: initially soft post-tariffs, but sharply rebounding as liquidation intensified. UBS observes that the dollar’s traditional safe-haven role has weakened, and now downside risks to US growth weigh more than any residual yield support.
EUR held firm as fiscal stimulus discussions in Brussels offset tariff headlines. However, the eurozone faces 20–25% tariffs from the US, and potential retaliatory EU tariffs may trigger a deeper feedback loop. Scotiabank notes the EURUSD range between 1.09 and 1.11, with fading bullish momentum and event-driven volatility risks rising.
JPY and CHF outperformed on haven demand. USDJPY fell to the mid-146s, with authorities likely to issue warnings about further gains. UBS expects USDJPY to trend toward 145 by year-end. CHF also remained firm, trading below 0.87 in USDCHF.
GBP declined modestly, with weak PMIs and full pricing of a May 25bps BoE cut. UK policy response has leaned diplomatic, with no major retaliation expected, but GBPUSD remains vulnerable in the 1.28s.
AUD saw its worst single-day decline since the 1980s, falling 5% Friday. Australia’s sensitivity to China and commodity volatility amplified the move. UBS recommends selling AUD downside with a 0.62 strike, noting that China may respond with stimulus to soften domestic impact, which could support AUD over the medium term.
NZD is in focus ahead of the RBNZ rate decision (Wednesday), where a 25bps cut is expected. Ongoing global volatility and export uncertainty support this expectation, and markets are closely watching the RBNZ’s tone for signs of further accommodation.
4. Eurozone: Retaliation Escalates, Data Risks Mount
Eurozone officials are preparing countermeasures to the US tariff package, especially the 25% levy on European autos. Trade ministers meet Monday to coordinate the response.
Key data includes:
- Sentix investor confidence (Monday)
- Retail sales (Monday)
- German CPI/HICP final (Friday)
Sentiment metrics may decline as tariff fears broaden. However, any fiscal response from Brussels could shift EUR dynamics, especially if paired with a dovish Fed narrative.
5. Asia-Pacific: RBNZ Decision, Tariff Contagion, and China Watch
Japan’s 24% US tariff exposure, paired with safe-haven inflows, has triggered a sharp USDJPY drop and volatility spike. Verbal intervention is possible if yen strength continues, but structural flows remain supportive.
China’s CPI, PPI, and M2 money supply prints are due Thursday. With tariffs now re-imposed at a cumulative 54% on some US goods, markets will watch closely for signs of domestic demand stimulus. UBS warns that USDCNY upside is limited near 7.40, and most of the trade-related FX risk has already been priced.
RBNZ is expected to cut by 25bps, reinforcing the trend of preemptive easing in smaller G8 economies. AUD remains volatile, with NAB Business Confidence (Tuesday) and RBA Governor Bullock’s speech (Thursday) as potential catalysts.
6. North America: Canada Holds Line, Mexico in the Crosscurrents
CAD showed surprising resilience despite global volatility. USDCAD remained inside 1.42–1.44, with fair value estimates drifting toward 1.4133. Scotiabank attributes CAD strength to relative insulation and stable risk pricing. However, this week’s BoC Business Outlook Survey will be critical for gauging business sentiment amid US policy shifts.
Mexico, despite early concerns, has seen less pressure from tariffs thanks to its USMCA carve-out. UBS highlights CADMXN dynamics as relatively insulated, supported by carry advantage and political stability. Mexico CPI and Banxico minutes (Wednesday–Thursday) round out the LATAM macro slate.
Trading Opportunities
1. CPI Surprise to the Upside: Trading the Extremes
Markets have priced in a steady inflation trajectory, with headline and core CPI expected to remain unchanged. However, any upside surprise would likely reinforce concerns about stagflation—pressuring growth expectations while leaving the Fed constrained.
Rather than speculating on precise ranges, traders should refer to a professional economic calendar to track the minimum and maximum forecasts from institutional economists. If the print lands near or above the upper end of those expectations, short equities.
A hotter-than-expected CPI could invalidate short-term rate cut bets and reinforce the Fed’s “higher for longer” stance.
2. Tariff Concession Headlines: A Shot of Optimism
Another opportunity lies in unscheduled news flow: rumors or credible reports that major economies (such as China or the EU) are engaging in serious trade negotiations or preparing to offer substantive tariff concessions.
Should such headlines emerge—especially from major players and not smaller economies—they could trigger:
- A short-term rally in global equities, particularly in export-heavy sectors
- Rebounds in commodities like copper and oil
The bar for market reaction isn’t a formal agreement—clear evidence of meaningful progress or constructive rhetoric from top-tier negotiators would be enough to shift sentiment and spark a tactical upside opportunity.