Urgent: Tariff Tensions Loom as Trump Revives Trade War Rhetoric

As we step into February, markets are once again grappling with the familiar uncertainty of trade tensions, as former President Trump reiterates his intention to impose tariffs over the weekend. This has already sparked noticeable movements across key currency pairs. USD/CAD and USD/MXN experienced sharp spikes overnight, although these gains have since partially retraced as scepticism around the full implementation of these tariffs remains high. The USD/CNH also reacted strongly, reflecting growing concerns over potential actions targeting China.

USDCAD – USDMXN & USDCNH Charts 

Despite these fluctuations, the broader FX market response has been relatively muted. Many investors appear cautious, likely waiting for concrete actions before fully adjusting their positions. Trump's anticipated signing of executive orders later today could trigger significant moves, particularly given the reduced liquidity typical at the close of New York trading sessions on Fridays. This timing, combined with month-end flows, could further complicate market reactions.

A key factor fueling market uncertainty is the ambiguity surrounding how swiftly these tariffs will be enacted. While Trump could invoke the International Emergency Economic Powers Act (IEEPA)—citing national security threats like illegal immigration and narcotics smuggling—precedent suggests a lag between announcement and activation. For instance, in 2019, Trump threatened tariffs on Mexico under the IEEPA, only to reverse the decision before they took effect.

Currency Dynamics and Market Sentiment

The USD’s performance post-2024 election has generally been robust, especially when compared to Trump’s initial tenure. However, the FX market is bracing for potential volatility depending on the actual execution of these tariffs. A confirmed 10% tariff on China, while somewhat priced into USD/CNY movements, could elevate expectations of further measures, particularly if IEEPA powers are leveraged before ongoing investigations conclude in April.

Simultaneously, developments in Europe are also influencing market sentiment. The European Central Bank's recent 25bps rate cut to 2.75% aligns with expectations of continued monetary easing. This has driven European bond yields lower, with the 10-year bund yield falling by 8bps. The Bank of England's upcoming policy meeting is now in focus, with markets nearly certain of a 25bps rate cut next week. This dovish outlook, supported by slowing wage growth and softer services inflation, could see the BoE cutting rates by up to 100bps this year—more than currently priced in.

Risks and Opportunities Ahead

The most significant risk for UK gilts and the pound stems from potential shifts in US policy. Should Trump's inflationary trade measures proceed, we could see a rebound in US Treasury yields, which would, in turn, lift gilt yields and weigh on GBP. Conversely, any postponement or softening of these tariffs would likely ease US yields and strengthen the pound.

Looking ahead, key data releases from Germany, Italy, and the US—including employment figures, inflation data, and personal spending metrics—will provide further clarity on economic trends and potential policy shifts.

We can possibly look for longs on USD end against weaker currencies like CAD and MXN, for the month of February. I have made a video you can watch it here!

This content may have been written by a third party. ACY makes no representation or warranty and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast or other information supplies by any third-party. This content is information only, and does not constitute financial, investment or other advice on which you can rely.

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