Markets Rethink FX Strategies Amid Tariff Turmoil.

  • US Tariff Delay Boosts Market Sentiment – The US struck a last-minute deal with Mexico and Canada, postponing tariffs for a month and securing border security concessions.
  • FX Market Adjusts to Trump’s Tactics – USD/CAD and USD/MXN dipped, and markets now expect future tariff threats to be met with skepticism unless implemented.
  • Euro Faces Cautious Optimism – Stronger-than-expected inflation data supported the EUR, but potential EU tariffs mean a sustained rally is unlikely.
  • GBP Emerges as a Winner – With minimal exposure to US tariffs and speculation about closer EU ties, the pound showed resilience.
  • Uncertainty Persists – Despite optimism, markets remain cautious as tariff threats could resurface, keeping high-beta currencies under pressure.

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Trade Tensions and Market Reaction
Yesterday’s market volatility stemmed from a last-minute agreement between the US, Mexico, and Canada to delay tariffs for at least a month. In exchange, President Trump secured stronger border security commitments from both nations, though trade itself wasn’t a primary topic of discussion.

The FX market saw a rapid shift, moving from concerns over Trump’s protectionist stance to buying the dips in affected currencies. USD/CAD and USD/MXN both traded below their Friday closing levels. Last week, we highlighted that Trump’s approach to tariffs would set a precedent for market reactions. Given how swiftly he reversed course, future threats of protectionism may now be met with even greater market skepticism.

FX Implications: A New Playbook?
A key assumption behind previous market reactions was that tariffs would only be imposed if they provided a clear economic advantage. However, with border security rather than economic rationale cited for the latest threats, the market was caught off guard. Whether Trump planned an eleventh-hour deal or was responding to domestic backlash remains uncertain. What is clear is that Trump is willing to use high-stakes negotiation tactics to achieve his policy goals, whether in trade or security.

For FX markets, this means the US dollar is unlikely to see prolonged rallies on tariff announcements alone. Investors are increasingly waiting for actual implementation and long-term enforcement before making significant moves. A case in point is AUD/CAD—given Canada’s exemption and China’s exposure to new tariffs, a sharper decline might have been expected, yet the pair is only down 0.5% on the day. This suggests traders anticipate the US and China could still reach a deal.

Lingering Tariff Uncertainty
Despite the temporary relief, markets are not fully discounting the risk of tariffs returning. The one-month delay leaves room for further uncertainty, keeping high-beta currencies under pressure. If the US and China move toward de-escalation, the dollar may face renewed selling pressure. However, now that tariff threats are a regular feature of market news, a sustained bearish trend for the USD seems unlikely. Support for the DXY index should hold around 108.0.

Today’s market focus will shift to US December JOLTS jobs data, though the FX landscape remains shaped by the fallout from the tariff scare.

EUR: Cautious Optimism Amid Tariff Jitters
While the US tariff saga dominated headlines, eurozone inflation data also stirred the market. January’s flash CPI estimate came in slightly above expectations, with core inflation holding steady at 2.7% for the fifth consecutive month. While this suggests upside risks remain, our view remains that inflation will trend lower over the year, with rate cuts likely bringing the ECB’s key rate down to 2.0%.

The euro benefited from improved sentiment following Trump’s tariff delay, as markets now expect similar deals elsewhere. However, caution is warranted—unlike Mexico and Canada, the EU faces trade-related tariffs rather than border security concerns. Trump may take a more prolonged approach, maintaining tariffs to pressure the EU before negotiations conclude. With this in mind, a major EUR rally seems unlikely.

If a US-China deal materializes, EUR/USD could climb toward 1.040, but gains may be capped at those levels.

GBP: The Surprise Winner
Amid the tariff turmoil, the British pound emerged as a resilient performer. The UK has limited exposure to US tariffs, with exports to the US and China contributing less than 2% and 1% of GDP, respectively. Furthermore, Trump has shown little urgency in targeting the UK with trade measures. A recent amicable call with Prime Minister Keir Starmer further supported GBP sentiment.

Additionally, Starmer’s visit to Brussels—officially focused on EU-UK defense cooperation—has sparked speculation about potential political realignment with the EU, which could bolster the pound’s long-term outlook.

Short-term risks remain, particularly with expectations that UK fiscal constraints will be confirmed today, and a potential dovish rate cut from the Bank of England on Thursday. However, EUR/GBP is unlikely to revisit its 0.8450 January peak soon.

*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.