Markets Juggle Trump’s Davos Drama: Oil, Rates, and China.

  • Trump Eases China Tariff Threats: In Davos, Trump signaled a softer stance on China tariffs, causing a dip in the USD. Markets doubt his commitment to aggressive protectionism but remain cautious about potential reversals.
  • Oil Prices Drop on OPEC Comments: Trump’s push for increased OPEC production drove oil prices lower. The administration’s focus on reducing energy costs may indirectly impact interest rates.
  • Fed Policy and Interest Rates: Trump hinted at future discussions with Fed Chair Powell but suggested no immediate pressure on rates ahead of the FOMC meeting, where rates are expected to remain steady.
  • Eurozone PMIs and EUR/USD Outlook: Modest PMI improvements are anticipated, but weak business confidence and external risks leave the ECB on track for gradual rate cuts. EUR/USD edges toward 1.0500, supported by reduced trade concerns.
  • GBP/USD Strengthens Amid Dollar Weakness: Sterling climbed near 1.2400 as the USD saw its sharpest losses in two months, fueled by Trump’s call for global interest rate cuts. PMI data will influence market movements today.

USD: Trump Temporarily Eases Tariff Tensions
At the World Economic Forum in Davos, Donald Trump reinforced his “America First” stance, but markets were more focused on his comments about oil prices and interest rates. Trump urged OPEC to boost oil production, driving crude prices lower after last week’s multi-month highs. The administration’s aim appears to be lowering energy costs, which could influence interest rates indirectly.

Regarding monetary policy, Trump signaled his intent to discuss rates with Federal Reserve Chair Jerome Powell “at the right time.” This suggests no immediate government pressure ahead of next week’s FOMC meeting, where the Fed is expected to hold rates steady—a move unlikely to spark major USD repositioning.

The dollar slipped overnight after Trump told Fox News he would prefer not to impose tariffs on China. This shift aligns with growing doubts about his commitment to aggressive trade protectionism. However, given Trump’s track record, a reversal in tone isn’t off the table. Meanwhile, today’s S&P Global PMI data and December home sales figures could further influence USD momentum.

EUR: Eyeing 1.0500 Amid Lingering Uncertainty
This morning, preliminary eurozone PMIs are expected to show slight improvements, with the manufacturing index forecast to rise marginally from 45.1 to 45.4. However, with external risks and European Central Bank (ECB) rate cuts priced in, a strong rebound in business confidence appears unlikely. The ECB seems poised to continue its gradual path toward a 2% rate this year.

ECB President Christine Lagarde will speak in Davos today, likely reinforcing recent dovish guidance. While EUR/USD saw a modest lift from Trump’s softened tariff stance, the currency pair’s risk premium has only partially recovered since earlier this month. Unless PMIs disappoint, the path toward 1.0500 remains open despite lingering US-EU trade tensions.

GBP: Sterling Surges Near 1.2400
The British Pound rallied this morning, nearing 1.2400 against the USD, as the dollar recorded its sharpest weekly losses in nearly two months. The Dollar Index (DXY) slid to a one-month low of 107.60 following Trump’s call at Davos for immediate interest rate cuts, linked to falling oil prices.

Despite Trump’s plea, the Federal Reserve, an independent entity, is expected to maintain its current policy rate of 4.25%-4.50% during its January 29 meeting. In the meantime, markets will monitor the preliminary S&P Global PMI data later today, with expectations for stable US private sector activity in January.

*All rates shown are indicative of interbank rates and should only be used for indication purposes only. It is important to note that foreign exchange rates fluctuate and that rates may vary depending on the amount and the base currency that is purchased or sold. Rates are correct as of 8:00am UK time. CentralFX are not responsible for the rates shown.