Morning Report
January 22, 2025
“With the market fixated on what tariffs are going to come from the US, day two of Trump’s second term brought more dollar swings, especially for CAD and MXN. For now, the market is relieved that the promises from his campaign have not been followed through, but we could see some concrete moves as soon as February.”
Sam Cornford – Head of Trading
USD
Trump’s second day in power brought more short-term noise and volatility in FX, with creeping scepticism about tariffs pulling the dollar back lower. There were more comments directed at the unfairness of the EU’s trade surplus, and he threatened tariffs on China in addition to Canada and Mexico on 1st Feb, but crucially the number floated was only 10%. That is significantly less than the 60% tariffs he promised on the campaign trail, and even half the size of what he’s threatening to slap on his neighbours. The market isn’t fully convinced that any of these tariffs are coming in 10 days’ time, and it is looking more and more likely that 10-20% blanket tariffs and 60% on China was a promise he will never follow through on. Of course, the difficulty with Trump’s rhetoric is that it is exceptionally difficult to separate the wheat from the chaff – he is always looking through a dealmaking lens and unpredictability is part of his negotiating toolbox. For the dollar, the proof will be in the pudding on 1st Feb and over the coming months, and in the meantime, we can expect a lot more headline-driven noise.
GBP
The pound pushed back above 1.23 late yesterday and is holding on for the first time in nearly two weeks, as US tariff talk dominates the market. GBP/EUR is trading slightly softer following public borrowing data out of the UK showing that the government borrowed £3.6bn more than expected in December, at £17.8bn, and the highest amount for December in four years. That is less than ideal for a currency at the centre of foreign investors’ fiscal concerns. Reeves spoke in a Bloomberg interview in Davos this morning, where she sought to calm markets again by reiterating that growth is the ‘number one mission’ and that the public finances are now in order.
EUR
The euro shed some tariff risk premium yesterday and launched back above the 4% mark even as a flurry of ECB speakers agreed with the market’s view that another series of rate cuts can come this year. In Davos this morning, President Lagarde admitted again that the risks for growth are to the downside in 2025 and pointed to gradual further cuts this year. On tariffs, she also said that she is not particularly concerned that rising US export prices will have an upward effect on inflation in the eurozone. Market-implied expectations for the volume of cuts this year have found an anchor at four, with the next to come on the 30th and at least two more to have been delivered by the June meeting. Today, look out for speeches from Villeroy, Knot, Rehn, Nagel, and Lagarde.
Markets
Stocks had a strong day yesterday and the S&P 500 jumped almost 1% as some optimism on the tariff outlook boosted risk sentiment. Now back at 6,050, the US index is edging closer to its record high of just under 6,100 back in December. Being the focus of Trump’s tariff comments yesterday, China was the exception and the CSI 300 dropped 0.9%.
Main Economic Events (All Times CET)
8:00am: UK Public Sector Borrowing
4:00pm: US Leading Index
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