Tariffs to Dominate The Markets This Week
- Feb 10
- 3 min read
GBP : Sterling gains despite renewed tariff concerns
As market mood is dominated by tariffs, the GBP/EUR is being bid again this morning. The pair will remain supported since traders anticipate that the UK will be less impacted than the EU. If European tariffs go into place early this week, a climb toward the €1.2120 region is still feasible. But tomorrow, attention might turn to the Bank of England's policy position. Catherine Mann, a former hawk who is now a dove, will talk about the UK outlook, including her recent vote for a 50bp rate drop and whether more would follow. A dovish narrative could be further supported by Thursday's dismal Q4 UK GDP report.
The Pound Sterling (GBP) ticks higher to near 1.2415 against the US Dollar (USD) in Monday’s European session. GBP/USD is still the most important pair to keep an eye on if sterling declines. A move toward the lower end of the $1.2250-$1.2500 range is possible.
EUR : Under pressure from spreads and tariffs
The Fed cycle has repricing due to the positive US jobs data, which has caused the EUR:USD two-year swap rate differentials to rise again above 190bp. It is anticipated that these differences will stay close to 200 basis points for the majority of the year, maintaining pressure on the EUR/USD exchange rate. In the meantime, ECB rate forecasts were not much affected by Friday's ECB staff report on the neutral interest rate. The possibility of tariffs striking Europe this week has pulled the EUR/USD pair back toward $1.0300; if "reciprocal" penalties target the EU or important European economies, the pair may slide toward $1.0225.
The US CPI data on Wednesday also poses a risk to the EUR/USD exchange rate. However, when investors turn their attention to the Munich Security Conference on Friday, sentiment may improve if the pair manages to withstand the concerns of both tariffs and inflation. The US-proposed ceasefire accord in the Russia-Ukraine dispute will be the focus here; a surprise agreement would be a huge boost to the Euro. With ECB President Christine Lagarde speaking to parliament at 2:00 PM GMT, today's data calendar is light.
USD : Trump warns of more tariffs
The dollar is still being supported by Friday's solid US jobs report and rising US tariffs. Fed easing forecasts have been trimmed back to 35 basis points, and they may get even tighter on Wednesday if the core CPI reports a strong 0.3% increase. It is also doubtful that Fed Chair Powell will adopt a dovish stance in his congressional appearance on Tuesday and Wednesday. Developments regarding tariffs are still subject to change. In addition to imposing existing tariffs on China, the US has proposed additional ones against Canada and Mexico. Under the pretense of safeguarding vital sectors, new 25% tariffs on steel and aluminum were announced over the weekend, impacting a number of nations, including Germany, South Korea, and Brazil.
Potential "reciprocal" tariffs that try to equalize trade imbalances are currently the main emphasis. These, which were initially anticipated in Q2, may arrive this week and target countries with higher tariff rates than the US, possibly affecting South Korea, Brazil, and India the most. Additionally, the auto industry has been identified as vulnerable. The dollar should continue to be supported because it is unclear when and how much these tariffs will be implemented. If expectations for a ceasefire between Russia and Ukraine increase, the biggest threat to long-dollar positions would be a change in European mood. As of right now, investors appear hesitant to unwind Dollar-long positions, and early this week, we expect DXY moving above 109.
