USD Faces Pressure as Tariff Talk Heats Up.

• USD under pressure: The dollar started strong but could weaken if tariff threats lose credibility or consumer confidence disappoints.
• Tariff uncertainty: Trump may use last-minute threats on Canada/Mexico tariffs for leverage, but markets largely expect no action.
• Euro remains vulnerable: German election results had little impact; ECB unlikely to react to today’s wage data, keeping policy dovish.
• GBP in focus: BOE’s Huw Pill speaks today; any dovish shift could impact rate expectations and weigh on the pound.
• FX market positioning: EUR/USD could test 1.050 on USD softness, but the broader trend remains bearish toward 1.030.

USD: Will the Dollar Slip Today?

The U.S. dollar started the week on a stronger note, getting a late boost from President Trump’s assertion that tariffs on Canada and Mexico are still in play. These 25% duties were initially postponed in early February, with March 3 now set as the deadline to avoid a USMCA trade conflict. As we highlighted in yesterday’s FX Daily, Trump may use last-minute tariff threats to gain leverage, mirroring his approach in February. However, our base case remains that these tariffs won’t take effect, and markets currently see only a moderate risk of escalation. That said, FX traders may begin pricing in more concern as the week unfolds, putting USD/CAD and USD/MXN at risk of near-term gains.

On the data front, today’s Conference Board consumer confidence figures will be under close scrutiny. After surging post-election in November, the index weakened in December and January. Consensus expects a further decline to 102.5 from 104.1, with a drop to 100 likely triggering a market reaction. Additionally, the Richmond Fed indices are due today, following soft readings from the Chicago and Dallas Fed yesterday.

While we don’t anticipate a clear trend for the dollar this week, its strength today will largely depend on fresh tariff-related comments from Trump or other U.S. officials. Without such rhetoric, and given the market’s tendency to discount tariff threats, the dollar could weaken if consumer confidence disappoints. This would reinforce concerns about softening consumption and push markets to reassess Fed expectations with a more dovish bias.

EUR: ECB Unlikely to React to Wage Data

As expected, the euro’s brief rally following the German election quickly faded, given that markets weren’t pricing in much political risk beforehand. The key downside risks for the euro remain unchanged. Reports indicate that incoming Chancellor Friedrich Merz is working on a €200 billion defense spending deal with his likely coalition partner, the SPD. While his recent comments about Europe’s need for strategic independence from the U.S. drew attention, markets are unlikely to view defense spending as a driver for economic growth, meaning limited upside for the euro.

The ECB releases its Q4 2024 negotiated wage data today. The previous quarter saw a sharp jump to 5.4% YoY due to one-off payments, which the ECB largely disregarded. With the Bank’s wage growth target near 3%, policymakers seem encouraged by broader signs of cooling, such as the Indeed wage growth tracker dropping to 2.5% in January. Given this, we believe today’s data is unlikely to shift the ECB’s stance, and any initial euro gains may reverse once the Bank reiterates its dovish outlook.

We anticipate EUR/USD could retest 1.050 amid potential USD weakness, but our broader outlook remains bearish, with a target of 1.030 in the near term.

GBP: BOE’s Huw Pill Takes the Stage

Bank of England policymaker Swati Dhingra reaffirmed her dovish stance yesterday, emphasizing that gradual rate cuts will still leave monetary policy restrictive and weigh on growth. She was among the two members advocating for a 50bp cut at the February 6 meeting, alongside Catherine Mann, who has shifted from hawkish to dovish.

Today, markets will focus on comments from Chief Economist Huw Pill. He leans hawkish, so any dovish remarks could influence rate expectations. Last week, Governor Andrew Bailey downplayed the recent inflation uptick as temporary, but market pricing remains cautious, with 50bp in cuts expected by year-end. We anticipate three cuts this year, partly due to worsening fiscal conditions.

While EUR/GBP may see limited upside due to the euro’s own struggles, we view GBP/USD as a cleaner way to play further pound weakness.