Market participants are on edge as U.S. President Donald Trump's tariff threats against Canada and Mexico approach a critical deadline. By the end of today, clarity is expected on whether these trading partners will face a significant 25% tariff. The situation has injected uncertainty into the markets, with traders closely monitoring developments. Meanwhile, the release of the U.S. core Personal Consumption Expenditures (PCE) data is anticipated, potentially adding further volatility. As investors assess the dual influences of trade tensions and economic data, the outcome could significantly impact currency markets ahead of the weekend.
The potential imposition of tariffs on Canada and Mexico has resulted in a sell-off of the Canadian dollar (CAD) and Mexican peso (MXN), while the broader dollar shows signs of strengthening.
"Neither CAD nor MXN were fully pricing in the tariff risk when Trump reiterated his protectionism plans versus USMCA partners yesterday, and the remarks caused a CAD and MXN selloff and broader dollar rally." – Francesco Pesole
Investors remain cautiously optimistic, suspecting that Trump's tariff threats are primarily negotiation tactics. However, if no updates emerge by day's end, expectations may shift towards a stronger dollar.
The U.S. core PCE data, released today, is forecasted to have increased by 0.2% in December. Analysts believe that risks lean towards a more robust figure, which could provide additional support for the dollar.
"On the data side, US core PCE is released today and is expected to have accelerated 0.2% in December, although risks are skewed to a stronger print. Anyway, expect the dollar to be primarily driven by the tariff story. If by the end of today we get no news on Canada and Mexico, the risks are probably of a stronger dollar, as markets could price in a greater chance of tariffs being announced tomorrow." – Francesco Pesole
The geopolitical climate, coupled with President Trump's protectionist rhetoric, continues to drive demand for safe-haven assets such as bullion. Should Trump refrain from imposing tariffs by tomorrow's deadline, experts anticipate a depreciation of the USD against not only CAD and MXN but also other currencies exposed to tariff risks.
"If Trump doesn’t deliver on his threat by tomorrow, we should see the USD depreciate not just against CAD and MXN but also with other currencies that are embedding tariff risks (like AUD, NZD, EUR). Investors’ intuition could be that Trump will only use tariffs mostly as threat for negotiations, but ultimately refrain from hitting its major partners." – Francesco Pesole
European markets remain influenced by regional developments, with German inflation cooling off in January. This has spurred expectations of further rate cuts by the European Central Bank (ECB), which recently lowered policy interest rates by 25 basis points. Consequently, the EUR/USD experienced renewed selling pressure, falling below 1.0400 in Friday's European session.
In contrast, the GBP/USD remains relatively stable, trading within a narrow range above 1.2400 during Friday's European session. The uncertainty surrounding U.S. trade policies and ongoing geopolitical tensions have kept investors cautious in their currency positioning.
The weekend marks a crucial period for assessing President Trump's commitment to protectionism. As traders digest recent events and brace for potential market shifts, all eyes remain on Washington's next move.