US President Donald Trump’s State of the Union (SOTU) address presents downside risks for the USD. The administration has shifted from a position of "unilateral strength" to "defensive campaign management," undermining the greenback’s previous support pillars.
First, the SOTU confirmed that the administration has entered a pre-election "campaign mode," prioritizing domestic economic stability over geopolitical brinkmanship. By favouring diplomacy over military action in Iran, the President indicated a preference to prevent a spike in oil prices that would fuel cost-of-living concerns. This pivot away from escalation would clear the way for Trump to pressure his Fed Chair nominee, Kevin Warsh, to implement aggressive rate cuts.
Second, the Supreme Court’s 6-3 ruling on February 20 has fundamentally undermined the administration’s most potent trade weapon. By invalidating the use of the International Emergency Economic Powers Act (IEEPA) for tariffs, the Court has ended the "Shock and Reward" strategy. The administration can no longer impose immediate, sky-high duties (e.g., 50%) to force concessions. The threat of "arbitrary escalation" has been replaced by a predictable, bureaucratic process.
The pivot to Section 122 replaces permanent leverage with a 150-day legislative cliff. Capped at 15% and requiring Congressional approval for extension, this tool lacks the "fear factor" needed to extract deep concessions. Hence, global trade dynamics have shifted from coercion to waiting. Major trading partners recognize that the administration faces a "legislative dead-end" on July 24. Rather than offering concessions, partners are likely to "run out the clock," betting that a divided Congress will block any extension of the 15% surcharge. The Supreme Court’s ruling also transforms the IEEPA tariff collections into a massive refund liability estimated at some USD175 billion, potentially upending the President’s core strategy of using tariff revenue to fund his “One Big Beautiful Bill.”
Against this background, we are vigilant that AUD/USD may mount a breakout above the 0.71 handle. While much of the G10 pivots toward easing, the Reserve Bank of Australia is doubling down on a hawkish path to tame a “stubbornly tight” domestic economy. With a 77.6% probability of a May rate hike now priced in, the AUD is no longer just a proxy for global growth; it is becoming the preferred destination for yield-hungry capital as RBA Governor Michele Bullock signals that the fight against inflation is not over. Australia’s January CPI remained stubbornly high at the same 3.8% YoY level as December, while the trimmed mean – the RBA’s preferred core gauge – firmed to 3.4% from 3.3%.
Quote of the Day
"What is great in man is that he is a bridge and not a goal.”
Friedrich Nietzsche
February 26 in history
The official groundbreaking ceremony for the San Francisco Golden Gate Bridge was held in 1933 with 100,000 people in attendance.
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