Tariff Delay Hopes Lift US and European Equities
Relief at the prospect of US President Donald Trump delaying tariff plans has propelled equities in the US and Europe towards record highs. The US dollar has weakened this week, but this may represent a short-term correction rather than a lasting trend change, as investors continue to deliberate over the timing of Trump’s tariffs. On Wednesday, EUR/USD reached a five-week high, and GBP/USD hit a three-week high, though further gains appear limited in the near term. Upcoming preliminary PMI data from advanced economies, due on Friday, will be closely watched. Meanwhile, the Bank of Japan is anticipated to raise interest rates, which could lend support to the struggling Japanese yen, down more than 1% against both GBP and EUR this week.
Trump Targets China, Markets Shrug
Financial markets showed little reaction to US President Donald Trump’s renewed threat to impose 10% tariffs on Chinese goods at the start of next month, citing concerns over the US trade deficit with the EU. While “actual” market volatility remains subdued, “expected” volatility remains elevated, particularly in the foreign exchange market, with traders taking positions against CNY, CAD, and MXN.
Markets had been on high alert for sweeping tariffs, which were arguably priced into the strong US dollar. Some may view this as a textbook case of “buy the rumour, sell the fact.” Trump’s tariff rhetoric has impacted currencies such as the Canadian dollar and Mexican peso, yet both have returned to levels seen on inauguration day. It seems investors may have overestimated the immediacy of Trump’s trade policies. Without immediate catalysts for a major dollar rally, the currency may face further depreciation if Trump continues to underdeliver on tariff threats. However, it remains unclear whether this is merely a tactical dollar correction or the beginning of a broader trend reversal.
While many currencies gained 1% or more against the USD on inauguration day, they still have significant ground to recover after substantial losses since the US election in November last year. With tariffs merely delayed and disinflationary trends stalling, the Federal Reserve’s bias to cut rates may be weakening, which could sustain favourable rate differentials and provide ongoing support for the dollar.
Euro Hits Five-Week High – Breaking the Downtrend?
EUR/USD has risen nearly 3% since touching two-year lows last week, hovering around its 2025 level and poised for its largest weekly gain in over a year.
From a broader perspective, the euro remains about 7% below its 2024 peak of $1.12. While it seems to have broken out of its four-month downtrend channel, a close above the 50-day moving average at $1.0436 will be critical to confirming whether the pair can extend towards $1.05 in the short term.
What’s driving the euro’s recent strength? This appears to be more a story of US dollar weakness as investors respond to President Trump’s indication that tariff negotiations are possible. EU officials have echoed a willingness to negotiate, boosting global risk appetite and reducing the trade risk premium in EUR/USD, enabling the pair to climb. However, some market participants may be overly complacent, as the Eurozone remains vulnerable to potential US tariffs in the future.
The risk of EUR/USD falling below parity has diminished, but uncertainty remains high due to Trump’s unpredictability. Furthermore, growth and rate differentials continue to favour the dollar, making a sustained reversal in the dollar’s fortunes unlikely at this stage.
Pound Near Five-Month Low Against Euro
GBP/USD is up over 1% this week but remains trapped in a downtrend channel, trading two cents below its 50-day moving average and five cents below its 100- and 200-day moving averages. GBP/EUR, down more than 2% this year, is hovering near its five-month low of €1.18, having broken below its key moving averages earlier this month.
Increased global risk appetite this week, driven by uncertainty around Trump’s tariff plans, has boosted demand for riskier currencies. Sterling has gained against traditional safe havens like USD, JPY, and CHF. However, higher-beta currencies such as NOK, SEK, AUD, and NZD have outperformed the pound. The euro also remains resilient, but the downtrend in GBP/EUR may have limited momentum. Weak UK economic data suggests the Bank of England (BoE) is highly likely to cut interest rates by 25 basis points to 4.5% in February. The European Central Bank (ECB) is also expected to cut rates next week. While rate differentials do not currently favour a higher GBP/EUR, they may act as a stabilising factor against further significant downside for the pair.
As for GBP/USD, the pair is trading roughly 7.5% below its 10-year average of $1.32, which aligns closely with where UK-US rate differentials suggest it should be. While this is not enough to shift to a more bullish outlook for sterling, it could provide support if cyclical narratives in the US or UK begin to change.
