In a week marked by significant economic developments, global markets are experiencing notable shifts following tariff announcements and political agreements. Mexico is now facing a 25% tariff rate, adding to its existing duties, as part of a series of economic measures announced by US President Donald Trump. Concurrently, the US Dollar has gained strength, impacting several currency pairs, including the GBP/USD pair, which continues its decline below 1.2300. Meanwhile, Belgium's political parties have finally agreed on a government, seven months after the June 2024 elections, leading to a €6.5 billion fiscal reform.
The US White House has underscored its "retaliation clause" in response to the tariff announcements, contributing to the strengthening of the US Dollar. This has led to pressure on currencies such as the Canadian loonie, which has surpassed USD/CAD 1.47 for the first time since 2003, and the Mexican peso, with USD/MXN exceeding 21 for the first time since 2022. In addition, Canada has announced 25% tariffs against some C$30 billion of US goods, with plans to expand these tariffs to C$125 billion in three weeks.
The economic ripple effects extend beyond North America. In the Czech Republic, the National Bank is expected to lower policy rates from 4% to 3.75%, a move prompted by Prime Minister Fiala's call for a faster easing of monetary policy. Meanwhile, Belgium has introduced a €6.5 billion fiscal reform, including €4.4 billion in lower taxes on labor, aimed at incentivizing workforce participation.
The trade-weighted greenback has seen a spike, rising from 108.37 to 109.50, reflecting the broader strength of the US Dollar amidst these developments. Additionally, the Chinese markets remain closed for the Lunar New Year celebrations; however, the off-shore yuan continues to trade near multi-year lows around the USD/CNY 7.35 area.
Gold prices have also been affected by these market movements. Having pulled back from its record high of $2,810, gold is now trading below $2,790 as of early Monday. Meanwhile, the US yield curve has experienced a flattening trend, with the front end adding 5 basis points and the long end losing 2 basis points.
In Belgium, the agreement on a new government marks a significant political development after an extended period of negotiations post-June 2024 elections. The €6.5 billion fiscal reform package introduced by the new administration includes substantial tax cuts aimed at boosting employment and economic growth.
The developments in the forex markets are noteworthy. The continued decline of the GBP/USD pair highlights ongoing uncertainties and pressures on the British pound. The Canadian dollar's fall against the US Dollar further underscores the impact of recent tariff announcements and their broader implications for trade relations.