The yen has recently been supported by the possibility of further monetary policy adjustments by the Bank of Japan. However, Bank of Japan Chairman, Kazuo Ueda, indicated that the central bank is keeping its options open, given the uncertain impact of US tariffs on inflation.
Megan Greene from the Bank of England noted the impact of US tariffs on the economy and inflation remains unclear. The tariffs not only affect US economic growth but also its trading partners, with the USD exchange rate complicating inflation assessments.
The Impact Of Us Tariffs
The anticipated effect of the tariffs was an appreciation of the US dollar, potentially causing inflation for trading partners. Instead, the dollar depreciated, leading to disinflation through the exchange rate.
This situation could spare central banks from having to navigate between economic and inflation risks. Opting for a more expansionary monetary policy becomes more feasible, reducing pressure on the dollar’s appreciation. However, unless the tariffs are lifted, it’s unlikely that their impact will reverse.
To put it plainly, the original analysis points to growing uncertainty around global inflation dynamics, with a key focus on how US trade policy affects not only its own inflation outlook but also that of its trading partners. Importantly, both Ueda and Greene suggest the outcomes are not playing out as widely predicted. The expected surge in the US dollar after the announcement of tariffs never really materialised in the way many assumed it would. Instead, we’ve seen dollar weakness. That, in turn, has cooled imported price pressures — an unintended bonus for economies facing awkward inflation prints.
Rethinking Trade Strategies
For our part, we need to recognise that the initial playbook for trading currency and rates on the back of tariff news requires revision. It appears that the foreign exchange market has diverged from textbook responses. Previously, tariffs were expected to lead to tighter monetary settings, particularly in economies exposed to US policy shifts. But the opposite seems to be at play, and this has real consequences when structuring calendar spreads or directional volatility strategies.
Tokyo’s approach under Ueda leans away from lockstep policy responses. His emphasis is clearly on gathering more data before tightening further. That might not sound groundbreaking, yet for those of us positioning rate-sensitive trades, it effectively sidelines any near-term yen strength that would have resulted from firm forward guidance. In this context, it’s less about whether rates move and more about how hesitantly the central bank leans into the tightening bias.
Across the Channel, Greene’s observations highlight a sobering truth: inflation calculations are getting harder, not clearer. When the exchange rate moves against consensus expectations, the entire forward pricing of inflation-linked instruments needs recalibrating. The market now faces the uncomfortable task of re-evaluating assumptions it previously held as stable — and quickly.
This new environment favours optionality. Rather than chasing the directional bet, maintaining flexibility in positioning seems more valuable, particularly when swing factors like tariffs remain unresolved and subject to geopolitical friction. For macro-driven strategies, what’s actionable here is the asymmetric risk: if tariffs stay in place, we may continue to experience slower inflationary pass-throughs — particularly outside the US. This tilts relative interest rate setting toward less urgency.
Within this setup, the probability of more dovish tones from central banks increases. That doesn’t mean rate cuts are guaranteed, but there’s more room for a steady hand than previously assumed. This opens far more possibilities for carry strategies, especially where forward pricing remains too steep relative to emerging disinflationary pressures.
Of course, the presence of tariffs doesn’t entirely void the chance of exchange rate reversals. If geopolitical sentiment shifts again — and it often does — we could see abrupt corrections. But in the near term, price action in G10 currencies doesn’t suggest markets are prepared to pay for rate risk across most fronts.
Modelling shorter-term vol surfaces against this scenario, implied vols are likely to stay suppressed unless a fresh macro catalyst materialises. In that sense, we’ve moved from a valuation-driven volatility regime to one that reacts — almost exclusively — to re-pricing of assumptions rather than data itself.
What matters now is where conviction in policy begins to fray. Between a cautious BOJ and a rather watchful Monetary Policy Committee in London, there’s visible hesitation. It’s the kind of drift that, while not explosive, lends itself to more refined relative value positioning.
We continue to believe that being too confident in directional rate bets, especially when driven by stale inflation narratives, will leave traders exposed. Instead, the emphasis falls on identifying pricing dislocations that stem from these misread signals. In this phase, clarity is elusive, but inertia should not be mistaken for certainty.
