Written by the Market Insights Team
Equities, cryptocurrencies and risk-sensitive currencies are falling and the US dollar is strengthening as fears grow for global trade. US President Donald Trump has followed through on threats to impose 25% tariffs on Canadian and Mexican goods, with the CAD tumbling to its lowest level since 2003. The euro is also reeling, down over 1% today with the threat of parity now looking more convincing in the near term.
Dollar surges as tariffs set to take effect
Boris Kovacevic – Global Macro Strategist
This is shaping up to be another pivotal week for markets. Last week was already eventful, with the Federal Reserve pushing back on rate cut expectations, the European Central Bank delivering a widely expected cut, and now, over the weekend, the Trump administration has escalated trade tensions with fresh tariffs on Canada (25%), Mexico (25%), and China (10%)—three of its largest trading partners. Going against the roll-out of tariffs from his first presidency, Trump has not made exceptions for consumer goods coming from China. In addition, the favourable de minimus exemption (imports under a certain threshold not subject to same scrutiny and tariff) will be removed.
This marks a significant escalation in trade tensions, with all three affected countries already preparing and announcing retaliatory measures. The newly imposed tariffs cover nearly half of all US imports, lifting the average tariff rate from 3% to 10%. With markets already navigating a delicate macro backdrop, this latest tariff escalation only adds to the complexity.
The situation remains fluid, with key details still unclear. However, as it stands, the tariffs are set to take effect tomorrow, and retaliatory measures from all three affected countries appear imminent. Early estimates from Bloomberg suggest these tariffs could reduce US GDP by 1.2% and add 0.7% to inflation—creating a stagflationary shock. In the medium term, this escalation in trade tensions challenges the US exceptionalism narrative and could put downward pressure on the dollar.
However, in the near term, uncertainty remains too high for markets to fade the Greenback. The currency is pushing higher across the G10 space as the Canadian dollar fell to the lowest level since 2003. For now, official responses—particularly from China—will dictate market sentiment far more than macroeconomic data, regardless of how significant this week’s releases are. Traders should remain highly attuned to headlines, as they are likely to be the key driver of price action in the days ahead.
Euro to parity risk increases
George Vessey – Lead FX & Macro Strategist
The euro has slumped over 1% against the US dollar to trade in the mid-$1.02 region following heightened tariff risks. US President Trump reiterated that tariffs against the European Union “will definitely happen”, which has significantly increased the risk of EUR/USD falling parity in the near term.
Although the EU has vowed to respond firmly to any announcement, it is unlikely to prevent traders from pricing in more policy loosening from the European Central Bank (ECB), which in turn will send German bond yields tumbling and weigh heavily on the common currency. Although Trump hasn’t yet outlined the level and scope of the tariffs against the EU, the prospect of tariffs alone couldn’t have come at a worse time for the region, which is already facing uncertainty about the outcome of German national elections later this month and a new government in France that faces a showdown in parliament over its budget bill. The plethora of political risks will act as a major drag on the common currency, and if the levies hurt the Eurozone economic outlook even more, then EUR/USD could be on track to revisit its 2022 lows around 0.95 over the coming months.
Euro implied volatility has spiked all along the curve, but the 2-month tenor is of particular interest given it now covers the April 1 deadline for the Secretary of Commerce to deliver a report on global trade imbalances, tariffs, and other items requested by President Trump. Also in the spotlight today is Eurozone inflation data for January, though this is likely to be overlooked given the overwhelming tariff risks driving market sentiment.
Pound at risk of dovish BoE
George Vessey – Lead FX & Macro Strategist
The risk-sensitive British pound is also under the cosh versus the US dollar and safe haven peers like the yen and swiss franc as Trump’s tariff talk overshadows macro data. GBP/EUR extended higher though, in a sign that the UK is deemed to be more insulated against US tariffs than the Eurozone, because it is not a major exporter of goods.
Rate differentials suggest GBP/EUR is fairly valued around €1.18-€1.19, but ongoing tariff risks have weakened the euro so much that the pair has reclaimed the €1.20 handle and could stretch to fresh cycle highs, with €1.21 the next upside target in focus. Given the political backdrop, the GBP/USD bias remains downwards. The pair failed to hold above $1.25 last week, bumping into resistance at its 50-day moving average. It now sits under $1.23, just over 1% from a fresh 1-year low. A break of the $1.20 handle is plausible over the coming months, or even weeks, depending on whether EUR/USD breaks parity.
The Bank of England (BoE) is expected to cut interest rates this week, but all eyes will be on the vote split and accompanying messaging to determine how many more cuts are coming this year. The messaging from December’s meeting was surprisingly dovish, with three members voting for back-to-back cuts and the majority expressing concerns about the weakness of output and employment. The soft UK economic data patch in the fourth quarter of last year has raised concerns of stagnation or even a technical recession, which could prompt the BoE to ease policy more than markets are currently pricing. This would likely act as a drag on the pound via the yield channel.
EUR/USD down 2.5% in a week
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: February 3-7
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.
