Dollar Adjusting to Trump’s Tariff Terms
- Jan 27
- 3 min read
Updated: Feb 10
GBP : The short squeeze is unlikely to persist
There were obvious indications of a short squeeze in Friday's market activity, especially in the GBP/USD pair. Because of the UK's budgetary difficulties, selling GBP/USD was a common trade earlier this year. However, the pressure on UK asset markets has subsided as a result of falling bond yields. Furthermore, the dollar has lost value due to conjecture regarding a possible relaxation of US tariffs. The $1.2500/$1.2600 range in GBP/USD offers UK corporations that are short on USD a good opportunity to review USD hedge ratios. As the Bank of England quickens its easing cycle and the Chancellor may have to enact additional fiscal tightening, it is anticipated that the GBP/USD exchange rate may fall to the $1.1900/1.2000 region later this year.
Highlights of this week's UK schedule include Andrew Bailey, the governor of the Bank of England, testifying before the Treasury Select Committee on Financial Stability on Wednesday. In an attempt to return attention to the growth agenda, UK Chancellor Rachel Reeves will speak at Oxford on the same day.
EUR : German IFO in focus
Following speculations that Washington may adopt a less tough position on China tariffs than first thought, EUR/USD temporarily surged above $1.0500 on Friday. Euro short-dated swap rates increased as a result of this development, indicating that the European Central Bank (ECB) might not need to make such a significant rate drop. The belief that tariffs might not be as inflationary and provide the Fed more leeway to soften was the reason why US short-dated swap rates fell at the same time. The two-year EUR:USD exchange rate spread thus became the tightest since early November, at about 165 bps. This is regarded as a short-term correction, and ING's quarterly prediction for EUR/USD indicates that it will trend toward $1.0100 by year's end, in part because it anticipates that the rate spread will widen back to 200 bps.
After Friday's minor increase in Eurozone PMI flash data, today's attention turns to Germany's IFO business sentiment data, where a little gain is expected. With the FOMC and ECB meetings on Wednesday and Thursday acting as the next major catalysts for movement, the EUR/USD exchange rate is probably going to be range-bound between $1.0400 and $1.0500 in the foreseeable future.
USD : Adjusting to the reality of tariff threats
The United States secured the return of illegal immigrants over the weekend by using the threat of import tariffs against Colombia. Tariffs may have less of an effect on short-term volatility now that the market seems to comprehend them better as a tool for policy. The impending February 1 deadline for tariffs on China, Canada, and Mexico, however, would make it more difficult for the dollar to make a big correction this week.
With a full schedule of central bank rate meetings, Q4 GDP statistics, and important inflation reports worldwide, attention may now turn to macroeconomic trends. A thorough synopsis of these events is given here by James Smith. Given the recent strength of US activity statistics, the FOMC meeting on Wednesday is not likely to present a serious negative risk to the dollar. On Friday, the core PCE inflation figure for December could be the focus instead. Inflation worries may be allayed by a 0.2% monthly increase, which would raise market expectations for the Fed's lowering cycle this year from 43 to 50 basis points.
It appears that investors are at ease holding long dollar holdings, and in a period of muted activity, DXY may return to the area of 108.50 to 108.80. Major IT companies will also be reporting Q4 earnings this week, which will put the US equity markets in the limelight. This comes as the competitive edge of US IT firms is being challenged by Chinese AI startup Deepseek, which questions the sustainability of the high investment levels needed to maintain present outcomes.
