Markets are adjusting after Trump’s last-minute agreements with Mexico and Canada, which delayed tariffs by a month. Moving forward, markets may approach tariff threats with more caution, but the added uncertainty makes significant dollar depreciation unlikely for now. Meanwhile, the pound is benefiting from a rare status as a safe haven.
USD: Reevaluating FX Responses After Trade Uncertainty
In summary, the US first reached an agreement with Mexico and then with Canada, with all parties agreeing to delay tariffs by at least a month. Trump secured stronger commitments from both countries on border security, though trade talks seemed minimal.
Within hours, markets shifted from assessing the consequences of Trump’s protectionist actions to actively buying dips in affected currencies. USD/CAD and USD/MXN are now trading lower than Friday’s close. Last week, as tariff threats ramped up, we suggested that Trump’s handling of this situation would set a market precedent. If markets hesitated to price in tariff impacts until the very last minute, yesterday’s sudden change in course may lead to even more caution regarding future protectionism.
One key reason for this hesitation was the expectation that tariffs would need clear economic justification. In the cases of Canada and Mexico, where border security was the primary motive, this justification appeared lacking—explaining the surprise announcement of tariffs over the weekend. It remains unclear whether Trump intended to make a last-minute deal with both countries or was responding to domestic backlash. In any case, markets now recognize that Trump might bluff his way into securing transactional wins, whether on trade or border security.
For FX, this suggests that the dollar is unlikely to experience significant rallies against affected currencies based solely on tariff announcements, unless tariffs are implemented and appear likely to stay. Take the US-China tariffs, for example. US duties on China are set to begin today, with China already retaliating with 10-15% tariffs on US energy exports and agricultural equipment, effective February 10. A cross like AUD/CAD should be trading much lower given Canada’s tariff reprieve and China’s continued exposure, but it’s only down 0.5%. This indicates that markets believe the US and China may strike a deal and delay tariffs.
The final point is that markets are not fully discounting the tariff threat just yet. Tariffs have only been delayed by a month, and the recent whirlwind of trade-related news has injected a higher level of uncertainty into the markets. This unpredictability weighs on high-beta currencies due to both direct tariff exposure and broader risk sentiment.
We can expect further adjustments in the dollar if the US and China move toward de-escalation in the coming days. However, with Trump having firmly introduced the tariff threat into daily market narratives, the case for a sustained downtrend in the dollar seems weak. We anticipate support for the DXY around 108.0. Today, the US will release December JOLTS job figures, but tariff news will likely continue to dominate the market’s focus.
EUR: Caution Remains
Amid the US-Canada-Mexico tariff developments—yesterday’s primary driver for EUR/USD—the eurozone’s January flash CPI came in slightly above expectations. The core measure remained steady at 2.7% (forecasted at 2.6%) for the fifth consecutive month, and the headline inflation ticked up for the fourth month running, challenging the ECB’s optimistic view on disinflation.
As noted by our economics team, inflation risks remain tilted to the upside, but we remain confident that the inflation trajectory will still be deflationary throughout the year. We continue to expect eurozone rates to be cut to at least 2.0%.
Regarding Trump’s handling of tariffs with Mexico and Canada, sentiment in the eurozone has improved with the expectation that a deal could be reached and protectionism avoided. However, caution is still needed. If Trump delayed tariffs on US neighbors due to domestic opposition to immediate economic pain for US consumers, that may not apply to EU tariffs. Trump can afford to play a longer game with the EU, potentially keeping tariffs in place for a prolonged period, which could cause the EU to feel the pain before a deal is reached. Notably, the EU’s potential tariffs are based on trade imbalances, not border security, which often leads to longer negotiations.
With this in mind, we are cautious about a major rally for the euro. Trump has already indicated that the EU may be next on the tariff list, and markets are likely to see better value in buying dips in currencies that have already experienced the peak of protectionism, while the euro is yet to face the worst of it. A US-China trade deal could push EUR/USD toward 1.040, but the rally might lose momentum around that level.
GBP: A Major Winner in the Trade Saga
The pound emerged as a safe haven among risk-sensitive currencies yesterday, maintaining solid strength after a potential US trade war was averted. The reason is simple: the UK has little exposure to US tariffs. UK exports to the US account for less than 2% of GDP, and exports to China are below 1%. Additionally, Trump doesn’t seem eager to impose tariffs on the UK, given the relatively small goods trade imbalance. Furthermore, Trump appears to have cordial relations with UK Prime Minister Keir Starmer after their recent conversation.
Another factor supporting sterling was Starmer’s visit to Brussels. While officially intended to strengthen EU-UK defense ties, markets may interpret this as a sign of Starmer’s efforts to reconnect politically with the EU, which is a positive for sterling. The currency remains sensitive to any developments that may improve the UK’s deteriorating growth outlook.
That said, there are some downside risks for the pound this week, including the likely confirmation today that the UK Chancellor’s fiscal space has been diminished due to rising borrowing costs. On Thursday, the Bank of England may deliver a dovish rate cut. Still, EUR/GBP is unlikely to revisit the 0.8450 January peak in the near future.
CEE: Resilience Amid Emerging Market Volatility
Today’s calendar is empty for the region, but global developments provide plenty of momentum. Following yesterday’s higher-than-expected inflation in Turkey and mixed PMI figures, attention will turn to the NBP and CNB meetings on Wednesday and Thursday. In the wake of US tariff developments, CEE currencies saw a sell-off, typical of broader emerging market trends. However, CEE currencies have shown resilience in this context, with the CZK and HUF rebounding sharply after initial losses.
Still, the CZK and HUF remain vulnerable in this environment, and a stronger US dollar will put pressure on the region. The upcoming CNB rate cut on Thursday and higher inflation in Hungary next week are likely to negatively impact these currencies. On the other hand, a hawkish NBP stance should keep the PLN well-supported. The rate differential saw the biggest rise yesterday in Poland among CEE peers, and Thursday’s press conference provides additional reason to expect that PLN weakness will fade despite its strong current levels.
