Dollar benefits from court’s tariff decision but outlook remains clouded

Court ruling changes the status quo 

After a relatively calm period, with the usual back-and-forth from US President Trump mostly being ignored by markets, investors should probably brace for more volatile sessions ahead following yesterday’s developments.

The US Court of International Trade, which is a federal court that examines civil actions related to US customs and international trade issues, has ruled that the US President cannot impose indefinite tariffs on imports from countries that hold trade surpluses with the US under the emergency powers law. According to the ruling, the Senate has the authority to impose trade restrictions and has not transferred the power to the US President to act unilaterally.

This means that both the universal 10% tariffs and the reciprocal tariffs are invalid, as they have not been ratified by the Senate. It is currently unclear, but the sectoral trade restrictions, including the steel and aluminum tariffs, appear to be valid.

Yesterday’s risk-on reaction loses momentum 

The immediate market reaction was significant, with both the US dollar and US stocks recording sizeable gains. However, both are surrendering a small chunk of those gains today. Euro/dollar is trading at 1.1275 at the time of writing, dollar/yen is hovering around 145.50, and the S&P 500 index is just a hair’s breadth away from the key 6,000 level.

The overnight positive sentiment in US stocks was also supported by Nvidia’s earnings for the first quarter of 2025 exceeding expectations. EPS reached 96c and total revenue climbed to $44.1bn, with these numbers being even more remarkable considering the $8bn in lost revenue following the US-China trade tensions. However, reports that the US President has instructed US chip designers to stop selling to China are somewhat clouding the outlook.

Trump’s response is anticipated 

Meanwhile, the US administration has already appealed the court’s decision, but investors are bracing for Trump’s reaction. Judging from his approach so far, the court’s ruling will probably make him even more determined to implement his strategy.

With Musk leaving office to refocus on his numerous other endeavors, the US President is probably left unchecked to abandon his recent congenial stance and return to a more confrontational approach. Attacking Democrats and the judicial system, which are erecting barriers to his attempt to “Make America Great Again”, will probably be the new norm going forward.

The US President will likely step up pressure on the Fed 

With the FOMC minutes from the May 7 meeting essentially confirming the current Fed stance about patience until the tariff situation clears up, Fed members should also prepare for increased criticism from Trump. The US President remains extremely dissatisfied that the Fed is not following the ECB's example of repeated rate reductions during 2025.

In this context, three hawkish Fed members – Richmond’s Barkin, San Francisco’s Daly and Dallas’ Logan – and two doves – Chicago’s Goolsbee and Board member Kugler – will be on the wires today. Their rhetoric is not expected to diverge much from the recent Fedspeak, but it is worth noting that only Goolsbee and Kugler are voting this year. Hence, any commentary regarding the overnight court decision will be closely scrutinized.

Busy data calendar and an interesting 7-year auction

The busy US data calendar is expected to keep investors on their toes, looking for evidence that the second quarter of 2025 is progressing much better than the abysmal Q1. Importantly, with the US Treasury yields rising again, there is a 7-year auction today. This is not a particularly popular area for bond investors, thus raising the probability of a weak outcome.

Gold suffers losses but oil rallies 

Gold and oil are moving in opposite directions today. Oil has climbed above the key $63 level and is now testing important resistance levels, while gold is trying to find a new price balance around $3,275. Reports about the Russian President’s demands to conclude the war are a step forward, but both Ukraine and the West are unlikely to cave in at this stage.