January 28, 2025

“The beginning of this week was expected to be quiet as we built up to the big central bank decisions over the next few days, but instead we have had some large swings already, as big AI news and another article on tariffs roiled markets.”

Sam Cornford – Head of Trading

USD

The dollar has been whiplashed already this week, thanks to an AI earthquake and some fresh tariff clues. DeepSeek’s cheaper contender to the major US AI models caused ruptures in the equity markets, as investors began to seriously question the sky-high valuations of the megacap tech companies and their huge AI hardware investment drive. The $1tn wipeout in US market cap triggered a rush for safe havens, driving Treasury yields lower and CHF and JPY both higher. But the dollar struggled to gain traction in the haven rally, and it instead fell to a near six-week low, in part because of the impact that contracting US household wealth may have on the Federal Reserve’s ability to cut this year.

Universal tariff fears have been revived this morning, however, and the dollar index has strengthened sharply after an FT report suggested that Treasury Secretary Scott Bessent is pushing for a global tariff to be implemented and increased in 2.5% monthly increments. This is the more economically sensible approach the markets had been expecting from Bessent, who wants to give firms time to adjust and other countries a ticking clock during negotiations, but it appears that they had become too complacent with the idea that negotiations would come first and not the other way around. Today, the focus is on a consumer confidence print this afternoon, and of course traders will be looking at the US equity market and any follow-up to the FT story.

GBP

Sterling’s break above the 1.25 handle did not last long yesterday as the dollar rebounded. However, the pound has made some steady progress higher against the euro despite Bank of England cut expectations rising to three this year. The UK calendar is quiet today, so the AI and tariff stories are likely to dominate again, but we get some key speeches from the BoE Governor and the Chancellor Reeves. Bailley is speaking at a hearing on the November Financial Stability Report, and Reeves is set to announce a series of measures to boost growth – whether the market and the British public approve could be significant for sterling in the coming months.

EUR

The euro has fallen back towards its 1.04 anchor this morning as markets have priced back in some tariff risk premium. The idiosyncratic effect of tariffs on EUR/USD tends to be quite plain to see, because it typically moves almost in lockstep with the 2-year yield differential – that spread is flat around 195bps this morning and yet the euro has dropped off by 0.7%. A lot of the big institutions will refer to this disconnect to its usual relationships as an undervaluation versus modelled fair value, suggesting that it is risk appetite in play rather than economic or market fundamentals. The EU has always been a key target for Trump, who has demanded that they buy more US goods to shrink its trade surplus with the US. Today, we get the ECB bank lending survey and some speeches from Villeroy and Cipollone.

Markets

The selloff in US tech stocks yesterday was of record proportions, after DeepSeek’s cheaper AI model led to questions about the mega valuations in the US equity market. Nvidia shed almost $600bn in market cap – the most in history of any US company in one day – in a 17% drop, and the tech-focused Nasdaq sank 3% to wipe out almost all of its year-to-date gains.

Main Economic Events (All Times CET)

2:30pm: US Durable Goods Orders
4:00pm: US Consumer Confidence

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