By Jane Foley, head of FX strategy at Rabobank

On Whose Authority

If the on/off nature of President Trump’s tariff policy wasn’t confusing enough, the latest twist in the tale has taken trade related uncertainty into another dimension. Yesterday the US Court of International Trade ruled that Trump does not have the authority to impose sweeping tariffs as he has done under the International Emergency Economics Powers Act, 1977. Over many years Congress has delegated many powers regarding tariffs to the president, but yesterday’s ruling says that “an unlimited delegation of tariffs authority would constitute an improper abdication of legislative power to another branch of government”.  In addition, while Trump has declared that the US trade deficit created a national emergency, the court has stated that the deficit did not fit the definition of an unusual and extraordinary threat for which the 1977 Act was designed to address. Unsurprisingly, it did not take long for the White House to push back, with spokesperson Desai declaring that “it is not for unelected judges to properly address a national emergency”. 

It is unclear how long an appeal will take or whether it will go all the way to the Supreme Court.  It is also uncertain how many other legal judgments on Trump’s policies will emerge in the coming weeks and months, since Trump’s tariffs have led to many challenges in courts around the country. It is also very likely that Trump will look for other legal frameworks that would enable his levies and allow him to push ahead with his tariff related agenda. For now the markets are displaying a measured amount of relief on the news. After a lower close yesterday, US stock market futures are trading higher, though a 5% surge in Nvidia in post market trading also boosted the tone. The USD is also trading higher this morning against all other G10 currencies. That said, investors will know better than expect Trump to capitulate and will continue to watch closely the news regarding the progress of trade deals.  

Yesterday, the U.S. told software makers in the semiconductor industry to stop selling to China. This suggests that Trump’s 90-day tariff pause is not a peace but a ceasefire to rearm. In Europe, the tone from EU trade negotiators has been sombre despite Trump’s decision earlier in the week to extend the deadline before 50% tariffs come into effect. Reports suggest that Trump’s fixation on addressing the US goods trade deficit with the EU means his administration is making requests beyond what the EU could agree to. These are likely to refer to European regulations and standards. That said, reports that Brussels has asked leading EU companies for their US investment plans suggests that FDI is featuring in the talks. Japan’s stance as the largest provider of FDI into the US has previously been cited by its officials as a reason why US tariffs on Japanese exports should be rolled back – to no avail, yet. That said, Japan/US trade talks have appeared to stumble forward on the news that Nippon Steel’s bid for US Steel has been approved with certain key caveats. The timing of Japan’s Upper House elections in July is a complicating factor for the talks given there is already press speculation as to who could take over from PM Ishiba. Meanwhile, the market is continuing to give the Japanese bond market an unusual amount of attention. 

A day after the BoJ signalled it may consider trimming issuance of super long dated JGBs in response to a clear shortfall of demand for the paper, Governor Ueda was in parliament yesterday answering questions from lawmakers on the issue. He stated that the BoJ will bear in mind that fluctuations on longer-term rates could affect shorter dated maturities, since these could have a more direct impact on economic activity. The BoJ is due to review its bond purchases at next month’s policy meeting. Given that this week’s price action has proved that sharp movements in JGB yields can influence long-term interest rates on the other side of the globe, the market will be watching. Encouragingly, yesterday’s auction of 5-year US treasuries was very well received which offered some respite to ongoing concerns about the outlook for the US fiscal deficit. Elon Musk’s views on US government spending are widely known and he has walked away from the White House having criticised Trump’s “big, beautiful” budget bill. Yesterday’s release of the minutes of the May 7 FOMC meeting showed that officials deemed that the previous week’s bond market volatility “warranted monitoring” as a potential risk to financial stability. They also noted that a change in the USD’s safe-haven status, along with rising Treasury yields “could have long-lasting implications for the economy”.

In geopolitics, Reuters is reporting that President Putin’s demands for ending the war in Ukraine are a "written" pledge not to expand NATO eastwards and a lifting of some sanctions. Reports also suggest Putin is demanding a resolution of frozen Russian FX reserves, Ukrainian neutrality and protection for Russian speakers in Ukraine - presumably on top of keeping the territory he’s taken. Russia currently controls 20% of the country. Brussels has announced plans to upgrade Black Sea infrastructure to handle military equipment as Germany will produce long-range weapons with Ukraine allowing it to strike deep inside Russia.

A Slovak Court has found the ECB’s Kazmir as guilty of bribery. If he fails to pay a EUR200,000 fine, a prison sentence is reportedly possible. For now, he will remain in his post. Yesterday, the FT reported that Lagarde considered stepping down for her role at ECB President early in order to head the WEF.  There have reportedly also been rumours that Lagarde could return to French politics for the French presidential election in 2027. Keen to underpin its credibility, the ECB has stated that Lagarde is determined to complete her eight year term and deliver on her mission.