Tariffs, Central Banks, and Key Data to Watch.

• USD Resilience Amid Tariff Threats: The US used tariff threats against Colombia to achieve immigration goals, but upcoming February 1 tariff deadlines for Mexico, Canada, and China may limit dollar weakness. Focus shifts to key economic events, with Friday’s core PCE inflation report likely influencing Fed rate cut expectations.
• Stable Dollar Outlook: Investors remain comfortable with long dollar positions, with DXY potentially drifting to 108.50/108.80. US tech earnings and AI investment debates could shape equity market sentiment this week.
• EUR/USD Range-Bound Near Term: EUR/USD briefly rose above 1.05 as tariff concerns eased and rate differentials narrowed. However, it’s expected to trend toward 1.01 by year-end. German Ifo sentiment data and ECB/FOMC meetings will guide movement this week.
• GBP/USD Short Squeeze Fades: Friday’s GBP/USD rally appears temporary, with the pair likely to drop to 1.19/1.20 later this year as the Bank of England intensifies easing and fiscal challenges resurface.
• Key UK Events Ahead: BoE Governor Andrew Bailey’s financial stability testimony and UK Chancellor Rachel Reeves’ growth-focused speech on Wednesday are major highlights for the UK economic calendar.

USD: Tariff Threats and Market Resilience
Over the weekend, the US leveraged import tariff threats against Colombia to secure its goal of returning illegal immigrants, highlighting the market’s growing familiarity with tariffs as a policy tool. While this could reduce market volatility, the looming February 1 tariff deadlines for Mexico, Canada, and China may keep the dollar from declining significantly this week.

Attention may pivot to macroeconomic events, including central bank meetings, Q4 GDP data, and inflation reports. The FOMC meeting on Wednesday is unlikely to pose a major downside risk for the dollar given strong US economic data. However, Friday’s core PCE inflation release could influence expectations for Federal Reserve rate cuts, with a 0.2% monthly increase potentially easing inflation concerns and shifting rate cut forecasts from 43bps to 50bps this year.

For now, investors appear comfortable holding long dollar positions, with the DXY potentially drifting toward the 108.50/108.80 range in quieter markets. US equity markets will also be in focus this week, with key tech earnings and questions about investment efficiency in the AI sector potentially shaking investor confidence.

EUR: German Business Sentiment Takes the Stage
EUR/USD briefly climbed above 1.05 on Friday after reports suggested the US might adopt a less aggressive stance on China tariffs. This drove changes in swap rates, narrowing the two-year EUR:USD swap differential to its lowest point since early November.

While this shift appears corrective, ING expects EUR/USD to gradually decline toward the 1.01 level by year-end, assuming the rate differential widens back to 200bps. Near term, EUR/USD is likely to trade within the 1.0400-1.0500 range, with the German Ifo business sentiment report and PMI data providing additional context ahead of the FOMC and ECB meetings midweek.

GBP: Short Squeeze Unlikely to Persist
Friday’s GBP/USD rally bore the hallmarks of a short squeeze, driven by lower UK bond yields and softer expectations for US tariff policy. However, this relief may be temporary. For UK corporates hedging USD exposure, the 1.25/1.26 range could be an opportune zone to adjust positions.

Looking ahead, GBP/USD could retreat to the 1.19/1.20 range later this year as the Bank of England accelerates its easing cycle and the UK government potentially tightens fiscal policy further. This week’s UK calendar highlights include Wednesday’s testimony from BoE Governor Andrew Bailey on financial stability and a speech by Chancellor Rachel Reeves addressing economic growth.