The global currency markets witnessed significant volatility on Tuesday, with the GBP/USD pair under bearish pressure and trading deep in the red near 1.2250. This downturn follows US President Trump's recent tariff threats, which have strengthened the US dollar. Meanwhile, USD/JPY experienced a sell-off after failing to maintain its position above the critical 20-day exponential moving average (EMA) and the 156.65 floor last week. The 156.65 level now acts as a formidable resistance point.
Traders are keenly observing whether bears can break the short-term sideways trajectory below 1.4300-1.4330 by the end of the day. The recent uptick in the UK's ILO Unemployment Rate to 4.4% in the three months to November has further contributed to the bearish sentiment surrounding GBP/USD. Additionally, the Canadian dollar, which is heavily reliant on commodities, found solace in the promising tariff developments, prompting a decline in USDCAD to a one-month low of 1.4259, slipping beneath its crucial 20-day EMA.
Despite the slump, USDCAD remains supported above the 154.30 level, and only a breach below this base could prompt a rapid decline. Forecasts indicate a potential slowdown to 1.8% year-over-year, marking the second moderation since the resurgence to 2.0% in October. January’s S&P Global business PMI figures, expected on Friday, could offer fresh insights into market dynamics.
The anticipation of additional Federal Reserve rate cuts has exerted downward pressure on US bond yields, providing support for gold prices. Investors are also closely monitoring Japan's economic landscape, with the Bank of Japan's policy meeting and national CPI figures scheduled for release on Friday. Market participants are confident that an interest rate hike of 25 basis points to 0.5%—the highest level in 17 years—could be on the horizon, marking the first increase since July 2024.
In the context of Canadian economic performance, CPI data might play a pivotal role in influencing USDCAD’s trajectory on Tuesday. As traders analyze these developments, they remain cautious about potential shifts in currency valuations and their broader economic implications.