Trumps First Day in Office Rocks US Dollar
- Jan 20
- 3 min read
Updated: Feb 10
GBP : Minimal impact from jobs data release
After a higher reading earlier, this measure has been erratic. Despite some irregularities in the unemployment numbers, general patterns indicate that the labor market is cooling enough to slow pay increases in the upcoming year. According to the BoE's most recent CFO poll, anticipated wage growth has just dropped below 4%, supporting the belief that a rate decrease in February is still inevitable.
Markets may keep pricing in more BoE easing and take into account GBP-specific concerns associated with high borrowing rates, which might pose short-term downside risks for the GBP/EUR exchange rate. The lack of imminent US tariff threats against the EU, meanwhile, may provide some minor support for the euro.
EUR : Potential for short-term gains
Despite yesterday's bounce, the EUR/USD is still oversold and cheap. According to some calculations, the pair is currently trading around 1.5% below its short-term fair value, which is indicative of persistent uncertainties due to tariffs. If Europe stays out of the direct target of Trump's tariff threats, the Euro might do well against other currencies. This support, though, might not last long because protectionist policies can change abruptly, as has happened in Canada and Mexico.
The Euro's continued underlying weakness across a number of macroeconomic metrics also limits the possibility of a long-term recovery above $1.0500 in EUR/USD. Regarding data, the German ZEW surveys from today will shed light on the state of the economy in the area. Expectations support the current recessionary prognosis by indicating minimal change from December's levels.
USD : Persistent Uncertainty
Foreign exchange markets experienced a great deal of volatility on Donald Trump's first day in office. Reports in the media that Trump would not apply tariffs on his first day in office caused the dollar to drop before the inauguration. Due to the US vacation, the market's substantial dollar-long positioning and reduced liquidity probably contributed to this move. Trump said in one of his first executive orders that the External Revenue Service will be established to oversee tariffs and taxes. Along with declaring national emergencies for energy and border security, he also rolled back some of Joe Biden's green energy programs.
Trump later said that by February 1, he will probably put 25% tariffs on Canada and Mexico, which caused the dollar to rise. Previous gains were wiped by the Mexican Peso (MXN) and the Canadian Dollar (CAD). The DXY index is still 0.7% lower than Friday's closing, though, as investors cautiously expect that universal tariffs won't be imposed all at once. The currencies with the strongest support were those linked to China and Europe.
There may be more negative effects on CAD and MXN if Trump carries out his tariff threats. Canada is getting ready for a leadership challenge and even early elections under departing Prime Minister Justin Trudeau. According to reports, Canadian authorities are prepared to respond with specific tariffs intended to unfairly disadvantage US producers.
This week, market attention will be mostly focused on Trump's executive actions, rather than data releases. There is space for "headline trading" and short-term market activity as the Federal Reserve is in its tranquil phase leading up to its meeting on Wednesday. The odds are still in favor of a higher dollar in the immediate future.
