Market Moves Amid Policy Shifts.

• USD in Focus: President Trump is driving bold tax reforms targeting multinational corporations, hinting at exiting OECD’s corporate tax pact and imposing double taxation on foreign firms, creating market uncertainty.
• Trade Tensions: Canada and Mexico face 25% tariff threats, but CAD and MXN rallied 1%, reflecting market hopes for compromise; risks of economic retaliation remain.
• Treasury Yields & Dollar Pressure: US data, including surging mortgage applications (+33%), could push 10-year yields to 4.50%, adding pressure to the dollar as bearish Treasury sentiment prevails.
• EUR Struggles for Breakthrough: EUR/USD hovers near resistance at 1.0450-1.0500 amid Trump tariff concerns, with ECB commentary at Davos reinforcing expectations for multiple rate cuts this year.
• GBP Holds Ground: GBP/USD stays above 1.2300 as the USD rebounds; Trump’s measured tariff plans ease dollar risk premium, supporting Federal Reserve rate stability projections.

USD: Corporate Tax Turbulence and Trade Tensions
President Trump’s second day in office has brought a bold push to revamp tax policies affecting multinational corporations. A memorandum on Monday directed the US Treasury to probe discriminatory taxes targeting American businesses. Additionally, the administration hinted at withdrawing from the OECD’s minimum corporate tax agreement and imposing double taxation on some foreign firms operating in the US. However, these potential actions remain speculative, leaving domestic and global markets in a state of uncertainty.

On the trade front, Canada and Mexico are under scrutiny after Monday’s 25% tariff threat. Both the CAD and MXN rebounded, gaining roughly 1% since Friday, signaling market optimism for a possible delay or compromise linked to migration cooperation. Canada has pledged retaliation, but outgoing Prime Minister Justin Trudeau emphasized avoiding tariffs as a priority. Despite this, downside risks for CAD and MXN remain substantial.

Today’s US data lineup includes the Leading Index and MBA mortgage applications, which surged 33% last week—marking the strongest jump since March 2020. Markets may push 10-year Treasury yields back to 4.50%, which could pressure the dollar. Our rates team remains bearish on Treasuries, reflecting soft dollar momentum tempered by temporary adjustments.

EUR: Testing 1.050 Amid Tariff Concerns
The EUR/USD continues to benefit from a weaker dollar, yet it struggles to breach the 1.0440 level. Resistance remains at the 1.0450-1.0500 range, closer to its short-term fair value of 1.0580. However, markets appear cautious, hesitant to fully discount Trump-related tariff risks for the eurozone.

Domestically, the ECB remains a focal point, with key figures, including President Christine Lagarde, speaking at Davos. Bundesbank’s Joachim Nagel, a known hawk, confirmed a likely 25bp rate cut next week and hinted at more cuts later this year. This underscores growing consensus for dovish ECB policies.

Expectations for four ECB rate cuts this year may solidify further with today’s commentary, fostering cautious market consolidation.

GBP: Sterling Steadies Amid Dollar Rebound
The GBP/USD pair dipped slightly during Wednesday’s London session but maintained Tuesday’s gains above the 1.2300 support level. The US Dollar Index (DXY) rebounded from a two-week low of 107.90, lifting the dollar slightly against the pound.

While the USD’s safe-haven appeal has softened, cautious tariff plans under President Trump are less threatening than anticipated. Trump’s announcement of 10% tariffs on China and 25% tariffs on North American economies is milder than his campaign threats of 60% tariffs on China. This balanced approach has eased the risk premium for the USD, tempering fears of persistent inflation and firming expectations that the Federal Reserve will maintain interest rates in the 4.25%-4.50% range for the next three policy meetings.