Markets Brace for Another Pivotal Week Amid Escalating Trade Tensions
This week is shaping up to be another critical one for global markets. Following an eventful stretch that saw the Federal Reserve push back on rate cut expectations and the European Central Bank deliver a widely anticipated cut, the Trump administration has now escalated trade tensions over the weekend with sweeping new tariffs.
The U.S. has imposed fresh levies of 25% on imports from Canada and Mexico, along with a 10% tariff on Chinese goods—without exceptions for consumer products, a departure from Trump’s first presidency. Additionally, the favourable de minimis exemption, which allowed certain low-value imports to bypass scrutiny and tariffs, will be removed.
Trump stated that tariffs on the EU are inevitable. However, he has yet to target the UK directly, likely due to the unique structure of its economy, the dominance of its services sector, and the absence of deeply integrated supply chains with the U.S.
With markets already navigating a fragile macroeconomic landscape, this latest trade dispute injects further uncertainty into the outlook. The newly imposed tariffs now cover nearly half of all U.S. imports, raising the average tariff rate from 3% to 10%.
Euro Slides as Tariff Risks Mount, Parity in Sight
The euro has tumbled over 1% against the U.S. dollar, slipping into the mid-$1.02 range amid escalating tariff concerns. President Trump reaffirmed that tariffs on the European Union “will definitely happen,” significantly increasing the risk of EUR/USD approaching parity in the near term.
While the EU has pledged to respond decisively to any tariffs, this is unlikely to stop markets from pricing in further policy easing from the European Central Bank (ECB). As a result, German bond yields are expected to decline further, adding pressure on the euro. Although Trump has yet to specify the scope and scale of the tariffs, the uncertainty comes at a particularly fragile time for Europe, with Germany’s national elections looming and France’s new government facing a parliamentary battle over its budget.
With a wave of political risks weighing on the euro, any economic fallout from U.S. tariffs could accelerate its decline, potentially dragging EUR/USD toward its 2022 lows around 0.95 in the months ahead.
BoE Rate Cut Expected, but Market Focus Shifts to Future Policy Path
The Bank of England (BoE) is widely expected to cut interest rates this week, but the key market focus will be on the vote split and policy messaging, which will offer clues on the pace of further easing this year.
December’s meeting signalled a surprisingly dovish shift, with three members voting for consecutive cuts and the majority highlighting concerns over weak output and employment. The UK economy showed signs of stagnation in the fourth quarter, raising fears of a potential technical recession. If the BoE signals a more aggressive easing cycle than markets currently anticipate, it could weigh on the pound through lower yield expectations.
