USD Strengthens as Tariffs and Fed Outlook Shape the Market.

• USD Strength: Strong U.S. jobs data and tariff expansion are keeping the dollar in demand.
• Fed Outlook: Rate cut expectations have been trimmed, and Powell’s testimony may reinforce a hawkish stance.
• Tariff Uncertainty: New 25% tariffs hit multiple countries, with ‘reciprocal’ tariffs possibly coming this week.
• EUR/USD Pressure: U.S. economic strength and tariff risks could push EUR/USD toward 1.0225, but a Russia-Ukraine ceasefire discussion may offer support.
• GBP at Risk: A dovish Bank of England outlook and weak UK GDP data could weigh on sterling, with GBP/USD likely testing the lower end of its range.

USD: More Tariffs, Less Easing?

Friday’s strong U.S. jobs report and the widening scope of U.S. tariffs are keeping the dollar well-supported. With expectations for Federal Reserve rate cuts this year now trimmed to just 35 basis points, upcoming events could push them even lower. If Wednesday’s core CPI print shows another 0.3% monthly increase, it will challenge the disinflation narrative. Meanwhile, Fed Chair Jerome Powell’s testimony to Congress on Tuesday and Wednesday is unlikely to strike a dovish tone, reinforcing the dollar’s appeal.

On the trade front, tariffs remain a moving target. The U.S. has imposed new 25% tariffs on steel and aluminum, affecting not just China but also Canada, Mexico, Brazil, South Korea, and Germany. There’s also speculation that ‘reciprocal’ tariffs could be introduced this week, targeting countries with higher trade barriers than the U.S.—possibly impacting Brazil, India, and Korea the most. Reports suggest the auto sector could also be in the crosshairs.

With uncertainty surrounding the scale and timing of these trade measures, the dollar remains in demand. The only potential headwind for dollar strength would be a shift in sentiment towards European assets if hopes for a Russia-Ukraine ceasefire gain traction. For now, the dollar index (DXY) seems poised to test the 108-109 range.

EUR: Weighed Down by Spreads and Tariff Fears

The fallout from strong U.S. jobs data has pushed the EUR/USD two-year swap rate differential past 190 basis points, likely keeping the euro under pressure. The prospect of U.S. tariffs on Europe has already sent EUR/USD close to 1.03, with a move towards 1.0225 possible if the EU is targeted. Adding to the downside risks, Wednesday’s U.S. CPI release could further reinforce dollar strength.

However, the euro may find some relief later in the week. Attention will shift to the Munich Security Conference, where discussions on a possible Russia-Ukraine ceasefire could support European sentiment. The only notable eurozone event today is ECB President Christine Lagarde’s appearance in parliament at 3:00 PM CET.

GBP: Caught Between Tariffs and the BoE

EUR/GBP is trading lower this morning, as markets assess the impact of tariffs. The consensus is that the EU has more to lose than the UK in this scenario, which could push EUR/GBP towards 0.8250 if European tariffs materialize.

However, the focus could soon shift to the Bank of England. Former hawk-turned-dove Catherine Mann is set to speak on Tuesday, providing insight into her unexpected vote for a 50bp rate cut last week. If her dovish stance gains traction, coupled with a weak UK GDP print on Thursday, it could pressure the pound further.

GBP/USD remains the main risk for sterling, with the pair likely drifting towards the lower end of the 1.2250-1.2500 range.