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China has ramped up retaliation against the US trade investigation, and markets are again jittery about the prospects of a fully-fledged re-escalation. There are downside risks for the dollar, but mostly against other low-yielders, as markets prefer to dump higher-beta currencies for now. Today, watch for NFIB data and a Powell speech.
 

USD: Not an April re-run, but risks are mounting

After the weekend de-escalation in tariff risk, market concerns have risen again overnight. China placed limits on five US entities of Hanwha Ocean, a Korean shipbuilding company, in response to the US investigation into China’s trade practices. The tone from Beijing remains firm, with the Ministry of Commerce vowing to “fight to the end” in the trade war. Meanwhile, Secretary Scott Bessent – who struck a conciliatory tone after Friday’s escalation – claimed China wants to ‘pull everybody else down’ in this FT interview.

The FX market is reacting to the re-escalation with safe haven demand benefitting JPY, CHF and EUR more than the dollar, while the highly China-sensitive AUD and NZD are taking a beating.

Our baseline view is still that an extension of the tariff truce on 1 November is more likely than a return to a fully-fledged trade war. The risks remain rather elevated, though. China’s trade numbers released on Monday showed Beijing can afford to stretch its muscles on trade with the US thanks to strong export diversification.

In a scenario of further escalation, the dollar may face downward pressure. However, its renewed status as a safe haven and expectations that the US administration might retreat could shift concern toward Treasuries. Should markets find reasons to ease their nerves about the Japanese political situation, the undervalued JPY is in a prime spot to benefit from further escalation.

US markets resume full trading schedules today after a long weekend, but the US shutdown remains far from being resolved. The few data releases we get should have a magnified impact, so it’s worth closely monitoring the NFIB Small Business surveys today. The “hiring plan” sub-index has been on a steady upward trend since May, but below year-end 2024 levels. Any meaningful correction in this usually disregarded series could trigger a market reaction.

On the Fed side, Chair Powell will discuss the economic outlook and monetary policy today, but with no fresh jobs data, he may simply stick to his recent cautious narrative. The impact amid data silence can still be felt in markets and the dollar probably faces some upside risks. The speaker's agenda today also includes doves Bowman and Waller, and 2025 voter Collins.

As discussed in our freshly-released monthly FX update, we aren’t supporters of an extended USD comeback. Once data resumes, we expect evidence of worsening employment to take the dollar back to early October levels, and then down to fresh lows by year-end. But this week may not give us much sense of direction again, and a few extra bits of bullish dollar momentum are probably on the cards in the near term.
 

EUR: French headaches remain

Unless major USD-negative news comes from the US (macro or tariffs), we doubt the euro will stage any idiosyncratic rebound before getting any clarity on French politics. Today, PM Lecornu is set to speak to parliament before announcing his budget proposal tomorrow, which will ultimately determine his chances of surviving a no-confidence vote, which is expected for Thursday. Another government collapse this week will likely make the euro miss out on any benefits from further escalation in the US-China trade spat. And should the tariff story de-escalate, EUR/USD would likely set its eyes on 1.150.

Elsewhere in the euro area, the ZEW survey out of Germany is expected to show some improvement in both the “expectations” and “current situation” metrics today. That is however unlikely to trigger much euro reaction at this stage.
 

GBP: Slightly dovish jobs data

This morning’s UK jobs report was mildly dovish. Private sector wage growth, a key BoE metric, undershot expectations, falling to 4.4% YoY. In level terms, the past three months have been consistently more benign, with the 3M annualised rate now at 2.4%. We expect the annual rate to drop to 3.7% by December – matching the BoE’s own forecast. Given wage growth has consistently overshot in recent years, simply seeing these numbers materialise would help ease concerns about upside inflation risks.

The slight fly in the ointment is public sector pay, which was hot in the latest month. But this reflects the current expansive fiscal stance, and the upcoming budget should make clear that this won’t be repeated next year.

Separately, unemployment nudged higher. While data quality issues persist, the ONS notes improvements. The trend remains consistent with payroll data: a steady cooling in the labour market and ongoing wage moderation.

A November BoE cut now looks unlikely. But December – after the Autumn Budget – is more in play than markets are pricing. Our forecast remains for the next cut in February, allowing the Bank one more inflation and jobs print.

Pricing for a December cut increased from 7bp to 9bp, and 2-year GBP swap rates are down 4bp after this morning’s release. EUR/GBP has rallied above 0.870, although further gains are set to face the drag of more French political noise.
 

CEE: Market suggest some weakness but waiting for policymakers to set the tone

Yesterday's inflation figures in Romania surprisingly edged down slightly, remaining unchanged at 9.9% YoY, with some relief coming from food prices. Services inflation continues to show resilience, and wage growth dipping below 5.0% adds further drag on demand. Our year-end projections remain 9.6% for 2025 and 4.5% for 2026. This should allow the National Bank of Romania to return to rate cuts in May next year in our forecast.

Elsewhere in the CEE region, today's calendar is light, and we will only see current account data from Poland and the Czech Republic. The market should return to full trading mode after yesterday's US holidays, and attention is shifting to this week's IMF meeting with several CEE speakers on the agenda. Yesterday's rapid downward movement in rates and the resilience of the US dollar suggest that CEE currencies may see some downward pressure in the coming days, but the tone may be set by statements from policymakers in Washington.

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