Dollar Volatile With New Tariff Threats
- Jan 31
- 3 min read
Updated: Feb 10
GBP : Sterling holds firm against USD as markets eye BoE decision
Since Monday, GBP/USD has been steady at $1.2400, maintaining its near-term outlook as it remains above the 20-day EMA at this level. For bulls of sterling, the 50-day EMA around $1.2510 is still a crucial barrier. The January 13 low of $1.2100 and the October 2023 low of $1.2050 are important levels for a decline. Resistance on the upside is the $1.2607 high from December 30.
As the Euro declines due to mounting anticipation of additional ECB rate cuts, the GBP/EUR rises, trading at about €1.1965 during Friday's Asian session. The Pound is still under pressure ahead of next week's BoE policy meeting, where markets expect a 25 basis point rate drop to 4.5%—its third since August, when rates peaked at 5.25%—so upside potential may be restricted.
EUR : ECB stays dovish, cutting rates as expected
Yesterday's 25bp rate drop by the ECB was exactly what was anticipated. Despite sluggish GDP and hopeful disinflation projections, it reiterated its dovish inclination while maintaining a data-dependent posture. The ECB appears intent on lowering rates independent of Trump's tariff proposals, in contrast to the Bank of Canada, which linked future cuts to US trade policies.
The media leak that suggested the ECB will remove the "restrictive" reference to rates in its anticipated March decrease was a significant milestone. The ECB's revised neutral rate assessment, which is expected on February 7, will determine if this indicates a hawkish change. The ECB's stance is still too dovish for now to merit reconsideration.
ECB pricing may be impacted by today's French and German CPI data, but considering Lagarde's tolerance for inflation swings, only a substantial upside surprise would cause EUR to climb sharply. EUR/USD will primarily follow changes in the USD that are influenced by tariffs. As markets factor in increased trade uncertainties, the EUR/USD exchange rate may fall below $1.0300 if Trump levies tariffs on Canada and Mexico.
USD : Countdown to Tariffs - Trump warns
The seriousness of President Trump's protectionist warnings will be put to the test this weekend. Trump's comments yesterday caused a selloff and a wider USD surge because neither CAD nor MXN had completely factored in the prospect of Canada and Mexico facing a 25% tariff deadline tomorrow. Although markets are still cautious, there could be significant downside risks for CAD and MXN if tariffs are implemented. Howard Lutnick, Trump's Commerce nominee, suggested earlier this week that if border needs are satisfied, tariffs might be avoided. The danger could be lifted, or at least suspended, by a last-minute agreement.
With worldwide FX ramifications, this decision will set the tone for Trump's larger trade policies. The dollar may depreciate versus AUD, NZD, and EUR in addition to CAD and MXN if tariffs are not implemented. If not, the dollar is probably going to get stronger.Regarding data, Q4 GDP decreased to 2.3% from 3.1% in Q3, and the US core PCE is estimated to be +0.2% for December. Last week's decline in unemployment claims suggests that the California fires have had little effect on the labor market thus far.
FX markets are currently obsessed with tariffs. Markets may price in a higher likelihood of tomorrow's tariff announcement if no news is released by the end of the day, which would boost the strength of the USD.
