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The Macro Brief – Transatlantic tariff truce
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Chris Hare, Senior European Economist, and Paul Mackel, Global Head of FX Research, talk through the potential implications of the US-EU trade deal.
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Transcript
Introduction and Podcast Context
00:00:01
Speaker
Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
00:00:13
Speaker
Make sure you're subscribed to stay up to date with new episodes. Thanks for listening, and now onto today's show.
00:00:23
Speaker
This podcast was recorded for publication on the 31st of July, 2025 by HSBC Global Investment Research. All the disclosures and disclaimers associated with it must be viewed on the link attached your media player.
HSBC Macro Brief Overview
00:00:35
Speaker
And remember to like and subscribe to The Macro Brief wherever you get your podcasts.
00:00:45
Speaker
Hello, I'm P.S. Butler and welcome to the Macrobrief from HSBC Global Investment Research, the podcast that looks at the issues driving financial markets across the globe.
US-EU Trade Deal Announcement
00:00:54
Speaker
This week saw a breakthrough tariff talks, with the United States and the EU announcing a new trade deal involving a baseline 15% tariff on European exports to the US.
00:01:06
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Now, this may have staved off the threat of an even higher tariff, But what impact will it have on the economy and currency markets? To put the deal into context and to discuss the implications, I'm joined in the studio by Chris Hare, Senior European Economist, and Paul Mackel, Global Head of
Economic Implications of Tariff Uncertainty
00:01:25
Speaker
FX Research. Chris and Paul, welcome.
00:01:27
Speaker
Thank you. Thank you. Before we start, important for our listeners to note that we're recording this on Thursday morning. ah High tariffs from some countries are due to kick off tomorrow, the 1st of August.
00:01:39
Speaker
So there may be some developments by the time you listen to this podcast, or they may not. What we can say with some certainty is that tariff uncertainty is here to stay. Chris, would you agree with that statement? And if you do, how hard is it to write anything about tariffs these days?
00:01:54
Speaker
Yes, it's all still very uncertain, not least August 1st. A whole swathe of countries have not yet done a trade deal with the US, ranging from India, Brazil, Taiwan, Switzerland. We'll see what happens there.
Scenario Planning for Tariff Impacts
00:02:06
Speaker
There's longer term uncertainty, of course, because the view of the White House in general is that US trade deficits are bad and that potentially remedying them through higher tariffs is good. ah So it's an issue that's here to stay.
00:02:20
Speaker
I guess my sort of analytical tip is to think in terms of scenarios. So we, for example, think in terms of what if the US raises a blanket tariff on an economy by 10 percentage points, then that would do X to growth, inflation, interest rates, and a whole load of macro variables.
00:02:40
Speaker
So our view is to have those kind of rules of thumbs in our back pockets and to try to deploy them whenever we do get the changes that are very hard to predict. So to borrow from Donald Ronsfeld, the latest no known is the US-EU trade deal, as I mentioned in my introduction. And there's been a lot of headlines about it, but what are the potential economic implications?
00:03:01
Speaker
Yes, in terms of the kind of contours of the deal, the EU had been subject to a 10% US tariff with regard to most of its goods. And the deal has a shift to a 15% tariff for most goods.
00:03:15
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Now that's opposed to a 30% tariff rate which was threatened to come in on ah August ah the 1st.
Growth and Corporate Reactions to Tariffs
00:03:23
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The 15% also applies to ah auto tariffs which is pretty important and there are some zero tariff carve outs for various sectors.
00:03:32
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Now our forecast had previously been based on the 10% tariff rate and the shift to 15% probably isn't massive in terms of the difference between the two. We'd think about a small extra negative impact on growth, maybe 0.1, 0.2 percentage points, not too much action in terms of inflation.
00:03:51
Speaker
But it is worth noting that 15% tariffs is more than three times higher than tariffs as they were before April. So we are still thinking in terms of a net negative, in terms of growth to an extent, disinflationary impact and potentially quite substantial headwinds to various export sectors with regards to the US.
00:04:11
Speaker
ah So yes, there are economic implications. It's not huge new news to us, but the overall impact still is there and somewhat negative.
Challenges and Currency Impacts of the Trade Deal
00:04:18
Speaker
But can I challenge you on that? I mean, for European corporates, isn't the certainty of knowing what the tariff is the good news?
00:04:25
Speaker
Yes, a reduction in uncertainty is a good thing. That was certainly the line from Christine Lagarde at the ECB meeting last Thursday. And potentially, we might see some delayed investment coming back on stream.
00:04:37
Speaker
The automakers were pretty happy about it, for example, because they were subject to a 27.5% tariff. 15%. that falls to fifteen percent But as I mentioned earlier on, there's still those broader uncertainties out there and we can talk about the implementation of the deal over time. Well, sorry to interrupt, but that's the point, isn't it? Is it the devil in the detail? I mean, trade deals normally, in my sort of market experience, take years to hammer out.
00:05:00
Speaker
Yes, indeed. ah So in terms of the blanket tariff, it's sort of there, but we don't have a legally binding text yet. We don't have the full list yet of zero tariffs that would apply. And there are also questions in terms of what happens in the longer runs. So for example, one EU commitment in the deal was to purchase $250 billion dollars worth of US goods, mostly energy goods per year, $600 billion dollars of extra investment from the EU into the US,
00:05:28
Speaker
But it's quite difficult to kind of push private companies to meet all those commitments. I'd diplomatically call those stretch targets. And if those targets aren't met, well, maybe the trade deal could be opened up all over again.
00:05:39
Speaker
Now, Paul, I need some help from you because supposedly this was good news, like you removing the uncertainty, and yet the euro is sold off. What's happening? Well, I think initially it tried to go up, but it was very, very brief. And I think that what we've seen through the course this year is just a transformation of sorts about how the dollar has been responding to the anticipation of tariffs, tariff headlines, and supposed deals being struck. If we go back to January this year, before Donald Trump became president,
00:06:10
Speaker
you know expectations were running running very hot and heavy that the dollar was going to keep strengthening in response to him having a strong start with tariffs. And that proved out to be very, very misleading.
00:06:20
Speaker
And then, as we know, in the following months, things became dicier because the dollar was getting more sensitive to the downside risk to U.S. growth. But what we've seen over the last few weeks is a change in the behavior of the dollar once more.
00:06:32
Speaker
And it's starting to respond a bit more to what's happening to the level of yields in the U.S. s being much higher. And that relationship has been very weak through most of the last six months, if not a little bit longer.
00:06:45
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But that seems to be one of the more dominant drivers. And I think that, yes, this news that we had between the EU and the US should be helpful in the context of reducing uncertainty.
00:06:56
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But it also tells us that lower policy uncertainty gives the room for other drivers to matter more for exchange rates.
US Economy Resilience and Interest Rates
00:07:03
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And that to us is the relative yields. And in turn, that's helpful for the dollar.
00:07:07
Speaker
Yes, and the and the US economy remains remarkably resilient. Absolutely. It's still hanging in there better than what people thought. If we go back to a couple of months ago, recession probabilities were much higher than where they are now.
00:07:20
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And even the message from the Federal Reserve last night, the FOMC, was telling us that, hey, maybe we don't even cut interest rates come September. And in turn, that has given another lift to the dollar once again.
00:07:33
Speaker
And Chris, another resilient economy is the Eurozone. I mean, the growth data was a positive surprise. And in fact, you have revised your forecasts. how' do you explain that? Resilience to a degree. I wouldn't get too carried away. So there's a lot of noise in the data at the moment. One thing that we saw was that in the second quarter, the Eurozone economy grew by 0.1%.
00:07:52
Speaker
Doesn't sound great, but there was a big effect here of an unwinding of very substantial front loading in exports to the US that we saw in the first quarter. That said, though, we thought the payback from that front loading was going to be even bigger. So actually, our forecast was were for a slight contraction in activity.
Eurozone Growth Surprises and Forecasts
00:08:10
Speaker
um So there's a whole load of that extra noise to play out. But as a result of the upside news in the data, we have lifted our growth forecast for the Eurozone this year from 0.9% to But as I say, a lot of that is to do with that noisy trade data.
00:08:26
Speaker
That said, though, what if a little bit of the upside news relates to the underlying story? And to be fair, actually, some of the business surveys in terms of the PMIs, the European Commission surveys have edged up a little bit.
00:08:38
Speaker
And maybe that tells us that the uncertainty related headwinds from global trade maybe haven't been all that big. So maybe there's just something in a little bit of underlying strength or a slight acceleration going on then in the data
Japan's Economy and Political Factors
00:08:52
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there.
00:08:52
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But don't get carried away. Yes, don't get too carried away. Can I just turn back to you, Paul, on other currencies, the yen in particular? ah That's a ah known unknown in the sense that ah we've had the fallout from the upper house election, then Japan signed a trade deal of sorts or agreed some kind of a trade deal with the US.
00:09:13
Speaker
Where do you stand on the yen? Well, if we go back to a little over a week ago, ah the way the market was first thinking about that information, about the upper house election and also the trade agreement, ah the yen was benefiting with that.
00:09:26
Speaker
And it came down to this reduced uncertainty, of course, but it didn't last. And I think that's right. I think that there's still ongoing question marks about the political backdrop in Japan.
00:09:38
Speaker
There are also a lack of details around this trade agreement between the US and Japan. And that's come back to start to pressure the currency lower once again.
00:09:49
Speaker
I don't think it's going to last. i mean, ultimately, we still think that the dollar is be facing a soft patch again in the coming months. But right now, it is having somewhat of an upper hand because it's been very oversold and the market was complacent about those high level of US
European Market Outlook
00:10:04
Speaker
yields. But again, I think it will be temporary.
00:10:06
Speaker
chris I'm going to Paris on the 15th of August and I try to book a restaurant and everything's closed. Is it all going to go quiet in Europe over the summer? Well, famous last words, we always hope for a quiet summer, don't we? I mean, on continental Europe, it tends to be the case that activity gets a little bit quieter, but you never know. We've got all these trade uncertainties. You never really know what financial markets are going to do. So we've always got to have someone manning the desk and seeing what's going on. um Yeah, be prepared.
00:10:33
Speaker
And Paul, you and I are both looking forward to the start of the football season in the UK. But any any big data points that you're sort of watching out for? Well, I'd like to follow on from what Chris said. I never trust the thinking that it's going to be a quiet summer. For most of my career, August has kept me busy ah in the currency market. So again, I don't trust this idea that it's going to be quiet.
00:10:55
Speaker
Are there data points to be considering? Absolutely. Let's see how the US data policy evolves. I also think it's going very interesting on the back of what Chris was saying about how did the soft data develop for Europe and the Eurozone in response to this deal.
Central Bank Meetings and Rate Expectations
00:11:09
Speaker
do Does the mood actually lift or do we start to see some semblance of disappointment that reaching some of these targets could be somewhat constraining? Time will tell. Well, I hope you don't have too busy a summer, but thank you very much for joining us today. It's a pleasure.
00:11:23
Speaker
Thank you very much.
00:11:28
Speaker
A couple of quick things before we go. There's plenty to talk about on the central bank front. As Paul mentioned, the Federal Reserve have just held their latest meeting, where rates were kept on hold for the fifth consecutive meeting.
00:11:41
Speaker
Our US economist Ryan Wang sees three 25 basis point cuts on the horizon in September, December and in March of 2026. And on the 7th of August, it's the Bank of England's turn to meet.
00:11:55
Speaker
Liz Martins, our senior UK economist, expects a three-way vote split among members, ultimately resulting in a 25 basis point cut, which would take rates to 4%.
HSBC Research App Promotion and Conclusion
00:12:06
Speaker
And finally, a quick reminder that if you're an HSBC Global Investment Research client, then don't forget to download our mobile app. The app features um all our latest research, videos and podcasts.
00:12:17
Speaker
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00:12:23
Speaker
So that's all for this week's edition of the Macrobrief. If you'd like to get in touch, please email us at askresearch at hsbc.com. From all of us here, thanks very much for joining us. We'll be back again next week.
00:12:54
Speaker
Thank you for joining us at HSBC Global Viewpoint. We hope you enjoyed the discussion. Make sure you're subscribed to stay up to date with new episodes.