US Protectionism Fears Revamped
- Jan 28
- 3 min read
Updated: Feb 10
GBP : Net positions turn short
Due to a change in mood, the market has become a net seller of the British pound; nevertheless, this could set up the currency for a recovery, as one Wall Street investment firm has adopted a bullish outlook. Investors are currently net short on the British pound, the first time positioning has gone negative since May 2024, according to the most recent Commitment of Traders data. A short position means that a trader or speculator has put money into a contract that will increase in value if the currency declines. A wider shift in mood since late 2024 is reflected in the current shift, where selling interest is outweighing buying demand.
A currency is more vulnerable to reversals in its underlying story when its positioning becomes significantly skewed. A rush to sell positions may result from such circumstances, increasing selling pressure and quickening falls. Positioning is a valuable contrarian indicator because of this dynamic. Currency that seems overextended in one way is frequently the target of speculators.
EUR : Risk premium may expand further
According to the market, the recent volatility in the equity market and the resurgence of tariff threats would probably affect EUR/USD more than the anticipated 25 basis point rate decrease and the likely reiteration of dovish language. Because of the Treasury's proactive planning, the danger of tariffs is being taken more seriously, which severely restricts the upside potential of the Euro. The Euro still lacks any significant domestic bullish catalysts, with the exception of a USD fall fueled by waning global tariff concerns. Later this week, a dovish ECB is anticipated to reaffirm this view.
The short-term risks for EUR/USD seem to have moved to the downside in light of the overnight tariff-related developments, with a possible return below $1.0400.
USD : Renewed protectionism concerns
Following a Trump-dominated start to the year, FX markets were anticipated to shift their attention back to central bank meetings this week. Rather, it has changed direction. A worldwide stock selloff has been sparked by the revelation by Chinese startup DeepSeek of a more reasonably priced AI model to compete with US IT heavyweights. The Dollar's subdued reaction as a safe haven amid the equity selloff is one noteworthy finding. Market expectations for a dovish Fed seemed to have grown, as did worries about the possible wealth effect on US consumers. The risk-off mentality consequently put pressure on typical risk-sensitive currencies like AUD, NZD, NOK, and CAD, while the low-yielding JPY and CHF became the favored safe havens rather than the USD.
But as Trump rekindled the mostly dormant debate on universal tariffs, the dollar saw a significant recovery late yesterday. A Financial Times story claims that Scott Bessent, the newly appointed Treasury Secretary, is in favor of a phased increase in universal tariffs, which may start at 2.5% and go up to 20%. Trump went on to say that he would prefer "much bigger" tariffs and made references to specific levies on goods like semiconductors, copper, and steel. These remarks cast doubt on the market's prior belief that tariffs would be imposed generally rather than on an individual basis, as was the case with Colombia. Instead of only being discussed by Trump, these ideas are being actively explored by the Treasury, which implies that the additional risk premium now built into Dollar crosses may be more persistent.
Even while market futures indicate some possible stabilisation today, there is still a considerable possibility of additional valuation-driven repricing in US tech companies. The wider effects of tariffs pose a longer-term threat to FX markets, even if the dollar isn't the preferred safe haven during stock selloffs. The dovish repricing of Fed expectations associated with equities falls is already being offset by the expected inflationary impact of protectionism. There seems to be no macroeconomic support for a dovish tilt, allowing for additional Dollar strength, unless the Fed signals tomorrow that it is actively watching equities volatility.
