January 07, 2025

“Trump-era spontaneous volatility is back, with yesterday’s reports on softer tariffs and Trump’s subsequent denial driving significant intraday swings. Today, the focus is on eurozone inflation and US services activity.”

Sam Cornford – Head of Trading

USD

The Trump 2.0 era has well and truly begun in markets, with the dollar dropping considerably on the back of a Washington Post report that suggested Trump aides were preparing to narrow the scope of universal tariffs to ‘critical imports’. The President-elect quickly contradicted the report, calling it ‘fake news’, but the move nevertheless stuck. It is not clear whether the leak was intended to test the waters, or if Trump disliked the reaction, or whether the story was simply misinformed. The fact that the dollar weakness persisted suggests that a) the market still sees some truth in the WP report and isn’t fully convinced by Trump’s rebuke, and b) there is appetite among investors to price in a more benign scenario for Trump-related global trade disruption, meaning the long dollar trade is at risk with stories like this. Expect spontaneous intraday volatility like this to be a feature of the market this year. Today, markets will be looking at two main pieces of data: ISM services and JOLTS job openings data. The consensus expects a stronger services sector than in November with a 53.5 print and for job openings to hold steady around the 7.7M mark.

CAD

Trudeau’s resignation helped the Canadian dollar to outperform yesterday (see our commentary in Bloomberg here and the Globe and Mail here). The move follows the resignation of his Finance Minister Freeland last month and calls from within the Liberal Party to quit given the sharp drop in his approval ratings from recent years. An election had to happen by October this year and this likely speeds up the timeline. A Conservative government could provide some significant upside for the loonie – leader Poilievre is famously fond of a strong CAD, deregulation, and tax cuts, and has floated firing Governor Macklem to install a more hawkish policymaker.

GBP

Sterling rode the dollar’s weakness to back above the 1.25 level yesterday. Some BRC retail sales data impressed overnight, expanding by 3.1% in 2024 versus a -0.2% estimate, though the positive impact on the pound was short-lived. The construction PMI is the only piece of data from the UK this morning, so the focus for GBP/USD and GBP/EUR is on the US services data and inflation in the eurozone.

EUR

EUR/USD was up 1.3% at its peak following the Washington Post report yesterday, and we are back above the 1.04 mark once again this morning. If there is truth in the article, the risk of the more extreme moves to parity will have subsided considerably. The Trump story was the main volatility driver, but there is also an underlying momentum on the euro’s side as the return of normal liquidity began to unwind the unprompted drop to a two-year low last week. Eurozone inflation could provide some support this morning, too, with both Spain and Germany having surprised to the upside so far, at 2.8% and 2.9% respectively. The bloc-wide headline figure is expected to rise to 2.4%, but core inflation to hold steady at 2.7%, meaning that ECB policymakers can probably look through the uptick for now, while keeping an eye on the rally in natural gas prices.

Markets

Stocks performed strongly across the board yesterday as the Washington Post report boosted hopes that the global economy would face smaller trade disruptions and that the Fed could continue on its easing path. The Eurostoxx 50 surged over 2% while the S&P 500 inched higher by 0.5%.

Main Economic Events (All Times CET)

8:30am: Swiss CPI
11:00am: Eurozone CPI
4:00pm: US ISM Services & JOLTS Job Openings

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