Synopsis:

Bank of America warns that markets may be underestimating the potential impact of today’s U.S. tariff announcement and offers a tactical trade idea that avoids direct USD exposure while positioning for possible surprises.

Key Points:

• Tariff Risks:

  • Markets expect selective tariffs, but broad-based tariffs would be a negative surprise.

  • If tariffs are benign, USD may weaken as negotiation optimism grows.

  • If tariffs are aggressive, the USD could rise in a short-term risk-off, even if the U.S. economy ultimately suffers more.

• USD Positioning Dynamics:

  • Recent USD buying and neutral positioning raise risks of a reversal.

  • BofA prefers to avoid direct USD exposure given the uncertainty.

• Trade Idea – Short EUR/GBP:

  • EU more vulnerable to U.S. tariffs than the UK.

  • GBP could benefit from April seasonality.

  • BofA entered a 1-month 0.83-strike EUR/GBP put (spot ref: 0.8365; premium: 18 pips).

Conclusion:

To hedge against complacency and sidestep USD volatility, BofA is tactically short EUR/GBP. The EU faces greater tariff risk than the UK, while seasonals favor the pound. Broader trade policy outcomes will determine if this defensive stance pays off.