In a volatile week for the currency markets, the euro continued its descent on Friday, grappling with asymmetric downside risks. Traders watched as EUR/USD traded below 1.0400 in European trading, with the euro being described as the "dirtiest shirt in the laundry basket" due to its ongoing struggles. Meanwhile, market participants eagerly awaited German and US inflation data, hoping for clarity amidst the turmoil.
The global market reacted dramatically to tariff announcements that President Trump linked to drug trafficking and illegal immigration concerns. Trump announced a 25% tariff on Canada and Mexico, effective March 4, and a 10% levy on Chinese imports, citing Canada's and Mexico's roles in drug imports and China's involvement in the fentanyl trade. This announcement sent shockwaves through the markets, with stocks demonstrating a classic "Wile E. Coyote" setup, running off a cliff without a parachute.
The forex market saw significant movement as a result of these developments. The U.S. dollar surged by 0.85% as traders sought refuge in safe-haven dollar plays amid escalating trade tensions. In contrast, GBP/USD dropped further below 1.2600 during the European session on Friday, adding to the currency's woes.
Despite upbeat German Retail Sales and Import Prices data, the euro failed to gain traction. The risk-off mood prevailed, exacerbated by sliding US bond yields that did not provide support for precious metals either. The U.S. 10-year yields fell to 4.25%, reinforcing concerns that trade tensions were evolving into a growth risk rather than an inflation driver.
The author of this report held a small EUR/USD trade war position but took steps to manage risk by setting a stop at 149.60. Additionally, the author closed all yen cross trades at the Tokyo fix due to an unexpected rally in the yen, aiming to shield their portfolio from further unpredictability.
Market observers remain skeptical about the long-term impact of the trade tensions, with many doubting that these tensions will spiral into a prolonged trade war. While uncertainty lingers, traders continue to assess potential outcomes and adjust their positions accordingly.