January 21, 2025

“Trump’s inauguration marks another four years of headline-driven, spontaneous volatility in FX. Yesterday’s moves came not from the ceremony or the speech itself, but from a WSJ article and a comment about potential tariffs on Canada and Mexico – a dynamic we expect to see throughout the week.”

Tim Hallinan – Trading Director

USD

President Trump’s inauguration day was eventful – to say the least – and gave markets a flavour of the volatility we can expect over the next four years. For FX, it was all about tariffs. It started with a Wall Street Journal report, which suggested that Trump would release a memo directing the federal government to investigate and remedy the US’ trade deficits, but would stop short of implementing day-one tariffs. By the close of day in Europe, the dollar had sold off over 1.3% versus both the euro and the pound as markets relished the surprise that Trump was not going to hit the ground running with aggressive blanket tariffs. However, in between the signing of a barrage of executive orders, notably on energy, immigration, and the creation of an External Revenue Service, the dollar recovered just under half of its losses after Trump pointed to 25% tariffs on Mexico and Canada as soon as February 1^st. CAD’s gains were almost fully wiped out overnight and MXN has dropped over 1% so far today. On a universal tariff, Trump said ‘we’re not ready for that yet’.

The data calendar is light today, though Trump-related headlines would likely have been the leading market driver anyway. That is also true for Canada, but there is a CPI report for December, with some broad softness across the BoC’s core measures set to confirm bets on another rate cut next week.

GBP

Sterling spent some time back above the 1.23 handle against the dollar yesterday at the peak of the tariff relief, but not before GBP/EUR briefly hit the lowest level since August. Labour market data this morning surprised to the upside this morning with a jump in ex-bonus wage growth from 5.2% to 5.6% in the three months up to November. That gives the Bank of England some reason for concern at the margin but ultimately had little impact on sterling, given that vacancies continued to fall, base effects drove part of the uptick, and that the pound has had a complicated relationship with gilt yields of late. The market is still pricing a February rate cut at more than 90%.

EUR

The euro always stood well to benefit from any signal that the tariff threatened throughout Trump’s campaign would eventually turn out to be more measured. It notched a two-week high after the initial WSJ report, having risen 1.5% at the peak, but has since dropped around 0.7%. While Canada, Mexico, and China were the primary targets for Trump’s trade wrath, the EU did get a mention as he demanded that it buys more US oil and gas. Today, the main data point is a ZEW sentiment index from Germany, which has unsurprisingly been rather subdued in recent months.

Markets

European and Asian stocks moved tentatively higher yesterday as Trump’s aggressive and wide-ranging executive orders tempered the boost to risk appetite from the lack of tariff news.

Main Economic Events (All Times CET)

8:00am: UK Wage Growth
11:00am: ZEW Economic Sentiment
2:30pm: Canada CPI

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