Key Dates, Tariff Talks, and Policy Shifts.
- USD Outlook: The dollar remains steady despite limited corrections, with key dates looming—April 1 for a review of US trade deficits and February 1 for potential tariffs on Mexico, Canada, and China, which could keep the dollar supported.
- Trump and Markets: Today’s focus is on Trump’s Davos speech, where topics like international tax policies and potential tariffs tied to the OECD’s Global Minimum Tax could boost dollar sentiment.
- EUR Performance: The euro’s recovery has been weak, with lingering tariff fears and anticipation of poor eurozone PMI data tomorrow, potentially prompting further ECB easing.
- GBP Challenges: Rising UK public borrowing and high gilt yields (5.47%) weigh on growth prospects, with markets expecting a BoE rate cut to 4.5% on February 6 amid soft economic data.
- Market Highlights: Chinese measures to stabilize local stocks have had little impact, while emerging market currencies like the Brazilian real show signs of recovery following local FX interventions.
USD: Lingering Uncertainty
The dollar’s Monday dip was shallow, reflecting optimism that initial tariff actions might not be as severe as feared. Now, markets are focused on two pivotal dates:
- April 1: The US Commerce Department and Trade Representative will present a comprehensive analysis of the country’s persistent trade deficits. These deficits clash with the “America First” agenda, and their findings may lead to significant tariff announcements post-April.
- February 1: President Trump hinted at imposing steep tariffs (25% on Mexico and Canada, 10% on China) if progress on border issues or fentanyl concerns stalls. This potential threat has limited further dollar losses, even as emerging market currencies, like Brazil’s real, find some stability following local FX interventions.
Today’s focus shifts to Trump’s virtual address at Davos, where international taxation and potential tariffs related to the OECD’s Global Minimum Tax could surface—another risk factor favoring the dollar. The DXY index may hover between 108.00 and 108.60, sensitive to further Trump-related headlines.
Meanwhile, efforts by China to stabilize its markets via state-backed stock purchases have yet to yield meaningful results.
EUR: Lackluster Recovery
The euro’s rebound this week has been muted, as lingering tariff concerns keep investors cautious. During Trump’s 2018-19 tariff era, similar unpredictability bolstered the dollar, and markets remain wary of a repeat.
Additionally, traders hesitate to reduce euro short positions ahead of tomorrow’s eurozone flash PMI release for January. Poor confidence data could prompt the ECB to pursue a more aggressive easing cycle, with 100+ basis points of rate cuts likely.
For today, EUR/USD may test the lower end of its 1.0350-1.0450 range, especially if Trump unveils new tariff rhetoric. Major movements might wait until next week’s FOMC meeting, the December core PCE data, or February’s looming tariff deadline.
GBP: Navigating Cautiously
The pound faces pressure from a sharp increase in UK public borrowing, fueled by rising borrowing costs and one-off military housing expenses. December’s figures may force the Chancellor to consider higher taxes or spending cuts, dampening growth prospects.
Adding to the strain, concerns over US tariff hikes have driven UK gilt yields to their highest in over 26 years, reaching 5.47% on January 14.
Attention now turns to the Bank of England’s first monetary policy decision on February 6, where markets expect a 25 bps rate cut to 4.5%. Expectations are rooted in soft inflation, declining retail sales, and weakening labor demand.
This week’s spotlight will be on Friday’s UK flash PMI data, expected to signal slower business activity growth.