Financial markets are being driven by concerns over AI advancements from Chinese startup DeepSeek, which sent US technology stocks into a spin on Monday with the Nasdaq dropping 3% – its biggest daily drop of the year. Additionally, Trump and his Treasury Secretary have hinted at universal tariffs on US imports, starting at 2.5% and potentially increasing to 20%. These threats have caused significant market reactions, with the dollar strengthening against major currencies.
Trump teases out policy plans
George Vessey – Lead FX & Macro Strategist
After its worst weekly decline in months last week on softer tariff talk, the stage looks set for a dollar rebound after Donald Trump’s Treasury secretary Scott Bessent stated he will be pushing for new universal tariffs on US imports to start at 2.5% and rise gradually. The ongoing uncertainty will continue hitting risk sentiment, and boosting USD, along with volatility, which was already elevated amidst the announcement from DeepSeek.
Technology stocks tumbled on Monday after Chinese artificial intelligence start-up DeepSeek released its latest large language AI model rivalling top AI systems like those from OpenAI and Meta, but with significantly lower computing costs. Shares in Nvidia, one of the biggest beneficiaries of spending on AI chips, plunged around 17%, wiping out almost $600bn of market value, a record loss for any company. Traditional haven currencies including the Japanese yen and Swiss franc climbed almost 1% versus the US dollar as risk aversion from the equities and bonds markets spilled over to FX markets. This lingering AI worry has kept risk taking in check, compounded by Trump’s latest tariff threats – vowing “much-bigger” than 2.5% and targeting specific sectors, including semiconductors, pharmaceuticals, steel, copper and aluminium.
As we warned in our FX Weekly report – investors could end up mispricing Trump twice: first by betting on immediate tariffs and then by betting any measures that are taken will be watered down. The dollar’s haven dynamics are back in action, but it’s Trump tariff threats really giving it an extra leg up today.
Revisiting policy rate divergence
Kevin Ford – FX & Macro Strategist
This Wednesday, two rate meetings are scheduled in North America. The FOMC is expected to maintain rates at 4.5% following consecutive rate cuts since September. A key focus will be Powell’s press conference and his response to Trump’s comments demanding lower rates. Conversely, the Bank of Canada (BoC) is anticipated to cut rates by 25 basis points (bps) to 3% and signal a pause to assess domestic activity and US trade policy.
What happened to the Loonie the last time there was a significant policy rate divergence between the Fed and the BoC?
In the past 30 years, the spread between the Fed and BoC interest rates has exceeded 100 basis points in favor of the US only once. During the Tequila Crisis of 1994-95, Mexico’s economic turmoil led the BoC to aggressively cut rates from 8.1% to 3%. The Fed made minimal adjustments, and by March 1997, the policy rate spread reached 250 bps. However, the rate differential had limited impact on the Loonie, which traded sideways between 1.34 and 1.38 from 1995 to 1997. Higher oil and energy prices bolstered the Canadian economy and kept the Loonie from moving above the 1.40 mark. One could say that back then, energy prices had a broader impact on FX market price and risk sentiment than rate differentials.
Today’s environment is quite different. First, the global macro backdrop offers little support for the USD/CAD. Second, by Wednesday, the spread will reach 150 bps and is expected to stay above 100 for much of 2025. And third, if tariffs are imposed, either this week or later this year, the BoC may revisit its policy and use its target rate to counterbalance tariffs. This would mean prioritizing more sensitive sectors of the economy, leaving the Loonie vulnerable to a wider rate differential, potentially pushing it to break the 1.46 level.
Euro profits from AI shock
Boris Kovacevic – Global Macro Strategist
Cautious optimism is spreading among euro buyers, as the currency benefits from a complex interplay between the AI-driven market shakeup and improving European economic data. The so-called “DeepSeek shock”—yesterday’s announcement of an AI spinout from Zhejiang University releasing an open-source model that outperforms industry leaders in key benchmarks at a significantly lower cost— triggered a broad sell-off in US equity markets.
Typically, such a risk-off wave would drive investors toward safe-haven currencies like the Swiss franc and Japanese yen, both of which are up against the euro. However, EUR/USD defied this trend on Monday. Instead of capital flowing into the dollar amid falling stock prices, investors are reassessing the “US equity exceptionalism” thesis, pushing EUR/USD above the $1.05 mark for the first time this year.
Meanwhile, European macroeconomic data continues to show signs of bottoming out. While a swift recovery remains unlikely, recent leading indicators—such as the PMIs and the Ifo index—have exceeded expectations over the past two trading sessions, offering some relief to the euro. Notably, the Ifo Current Conditions Index rose to 86.1, its highest level since August 2024. Despite these encouraging signals, we believe the euro’s upside remains constrained by weak economic growth prospects and rising trade tensions, which could limit further gains in the near term.
Pound slides from $1.25 amidst risk aversion
George Vessey – Lead FX & Macro Strategist
The British pound, a risk-sensitive currency, has come under renewed selling pressure against its safe haven peers like the USD, JPY and CHF this week. GBP/USD had breached the downtrend line that defined the direction of trade since last October, but has bumped into resistance at its 50-day moving average. The pair is still around 3% higher than its 1-year low, but over 7% below its 2024 high.
Both the pound and the euro climbed against the dollar on Monday despite the DeepSeek news roiling risk appetite. But both currencies are underperforming the US dollar on Tuesday though as a result of renewed tariff threats from Trump. Moreover, on the UK domestic front, food prices climbed at the fastest pace in nine months at the beginning of 2025, according to data from the British Retail Consortium. This adds to the list of inflation threats for the Bank of England to consider at its meeting next week and keeps stagflation fears alive in the UK, which has caused a decoupling between gilt yields and the pound of late.
As for GBP/EUR, the pair has climbed for four days straight, back above its 200-day moving average and over three cents above its 5-year average rate of around €1.16. The short-lived downtrend appears to have come to an end and a return to levels at €1.20 and above looks plausible over the coming weeks.
Oil and equities on the backfoot
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: January 27-31
All times are in GMT
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
