USD gains from the morning were erased by the close of European trading as markets mulled over the idea that Trump perhaps isn't gearing up for a trade war, and that the threat of tariffs is instead going to be used as a negotiation mechanism. Earlier losses on CAD versus USD were all but wiped out by the close of play to illustrate the point.
Overnight, Trump came out to state that he is considering a 10% tariff on all Chinese imports by 1st February, as well as threatening to add sanctions on Russia if Vladimir Putin fails to come to the table to negotiate on Ukraine.
*Daily move - against G10 rates at 7:30am, 22.01.25
** Indicative rates - interbank rates at 7:30am, 22.01.25
Given how much USD has strengthened since President Trump's Election win in November, talk across FX desks seems to revolve around potential of further corrections on USD should his actions on tariffs continue to underwhelm. Interest rate differentials should give USD some support, given markets are only pricing in 38bps worth of Fed rate cuts this year, versus the 65bps and 100bps worth of cuts from the Bank of England (BoE) and European Central Bank (ECB).
Trump could still impose severe tariffs which would trigger USD gains, but if the signals from his first few days continue, then, as mentioned above, USD weakness could well continue. However you look at it, it does seem volatile days are ahead for USD, and in the short term we view the currency’s weakness as a buy the dip opportunity.
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