February 05, 2025

“The currencies that suffered early this week when Trump’s tariff threats became real – EUR, CAD, AUD, NZD, NOK, SEK – have recovered strongly over the past few days on the relief that negotiations might prevent a global trade war. With China still unresolved, however, there may be some more pain to come.”

Tim Hallinan – Trading Director

USD

A relief trade over the past couple of days now has the dollar now trading weaker than it had been last Friday, right before the short-lived tariff scare. However, while Canada and Mexico are in the clear for a month at least, a US-China trade war is still bubbling, and a Trump-Xi phone call never materialised yesterday. Nevertheless, the market has been optimistic enough about a resolution to erase a significant amount of tariff risk premium in the likes of EUR, CAD, and AUD. That is likely because China’s retaliation is very modest in comparison and suggest a keenness to avoid a conflict – the targeted US imports amount to only $20bn, versus the $450bn of Chinese imports to the US now subject to a 10% duty. The offshore yuan has recovered all the losses that it suffered at the open this week. The dollar’s direction now depends on whether investors are underestimating the risks for a persistent trade war. It is worth mentioning that Trump announced his wishes to take over Gaza, resettle Palestinians, and turn it into the ‘Riviera of the Middle East’, but markets have largely understood this to be an attempt at shock-and-awe to give him the upper hand when it comes to negotiations.

ADP non-farm employment change and the ISM services PMI are the data in focus today, after job openings dropped by more than expected in yesterday’s release. ADP non-farms has virtually no predictive power for the actual non-farm payrolls release on Friday, but we do tend to see a move regardless. The consensus for ISM services is a strong, business-as-usual 54.0 print.

GBP

Sterling is attempting a break above the 1.25 handle this morning, having dropped to the 1.22s only two days ago. The pound has been driven by its unique reaction function to the US tariff story – worsening sentiment is still bad for GBP/USD, but it is generally good for sterling crosses given the assumption that the UK will be shielded from the direct impacts. While most of the moves from Monday morning have been fully unwound by now, GBP/EUR is holding on to its gains. Investors appear to be coming to the conclusion that the UK is a safer bet while tariffs are hanging over the EU. The Bank of England comes tomorrow afternoon, and in the meantime, it is the US data and the tariff story in charge.

EUR

The euro has lifted 2.5% from its trough at the beginning of this week, as the brief bout of risk-off sentiment has been replaced by tentative optimism that negotiations should prevent large-scale trade wars. The euro is not out of the woods yet, though, and the FT has reported this morning that the EU is preparing to target the US tech sector if Trump places tariffs on the bloc. The only data today is a final revision to the January PMIs and a PPI print for December. ECB Chief Economist Lane also speaks later today.

Markets

The markets continued to claw back losses from the latest tariff scare yesterday. The S&P 500 gained 0.7%, the Nasdaq 1.3%, and the Euro Stoxx 50 rose 0.9% to extend its year-to-date gains to 7.5%. Germany’s DAX and France’s CAC 40 are up 8.0% and 7.5% respectively in 2025 – something that scans as strange given the tariff uncertainty and weak eurozone growth prospects.

Main Economic Events (All Times CET)

2:15pm: ADP Employment Change
4:00pm: US ISM Services PMI

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