EUROPEAN FX UPDATE: Trade continues to dominate as China launched countermeasures vs. the US

USD: DXY U/C; 108.67

• Once again, trade is continuing to dominate the narrative for the US. To recap, Trump was able to strike a deal yesterday with Canada and Mexico to delay the implementation of tariffs by one month. However, optimism on the trade front was dealt a blow overnight after the new 10% tariff on all China exports to the US took effect after the deadline passed. In response, China is to levy countermeasures on some US imported products with 15% tariffs on coal and LNG, as well as 10% tariff on oil, agricultural machines and some autos from the US. The main issue for markets going forward is whether tariff announcements from Trump should be viewed as a negotiation tactic or a more permanent state of affairs. Note, from a monetary policy perspective, Fed's Collins (voter) is of the view that the Fed would try to look through one time price level increase. Today's data docket sees the latest JOLTS report ahead of Friday's NFP print. DXY currently sits towards the lower end of yesterday's 108.33-109.88 range.

EUR: EUR/USD U/C; 1.0344

• EUR resilient vs. the USD after yesterday bouncing off a 1.0209 low to close @ 1.0343 alongside relief that Trump was able to strike a deal with Canada and Mexico. That being said, the EU is far from out of the woods with the Telegraph reporting that Trump is reportedly considering plans to impose a 10% tariff on the EU. ING notes that this could be a more durable and problematic issue for the EU compared to Mexico and Canada as issues for the latter were resolved by border measures, something which does not apply to the EU. Instead, the US' issue with the EU is purely one of trade, which will likely be harder to resolve.


• 
  EUR/USD opex: 1.0175 (1bln), 1.0200-15 (1.2bln), 1.0250 (1.1bln), 1.0265 (700mln), 1.0275-80 (1.6bln), 1.0300 (1.5bln), 1.0320-25 (1.7bln), 1.0375 (1.1bln), 1.0395-1.0405 (2.1bln), 1.0425 (2.1bln).

JPY: USD/JPY +0.3%; 155.24

• JPY is a touch softer vs. the USD after a choppy session yesterday which saw initial haven demand for the JPY unwound as Trump struck deals with Mexico and Canada. In terms of Japanese-specific updates, BoJ Governor Ueda said the BoJ is aiming to achieve 2% inflation as measured by overall CPI, on a sustainable basis. As a reminder, the next 25bps hike by the BoJ is not priced until October. USD/JPY is currently tucked within yesterday's 154.01-155.88 range.

GBP: GBP/USD -0.1%; 1.2435

• GBP softer vs. the USD but once again to a lesser extent than most peers on account of the UK not being directly in the firing line of Trump tariffs (for now) on account of the UK's small trade exposure to the US. Furthermore, some positivity is also being attributed to the overtures of the Starmer government to develop a closer relationship with the EU. Today's UK docket is light in the run up to Thursday's BoE rate decision which is expected to deliver a 25bps cut via an 8-1 vote. Cable is currently towards the top end of yesterday's 1.2250-1.2455 range.

Antipodeans: AUD/USD -0.4%; 0.6203. NZD/USD -0.4%; 0.5606

• Both softer vs. the USD as the latest retaliatory trade measures by China act as a drag. Rabobank notes that "New Zealand is more exposed than Australia, owing to its greater reliance on trade, the greater importance of the USA to its export program, its trade surplus with the USA and its low levels of defence spending". Yesterday, NZD/USD managed to pick itself up from yesterday's 0.5516 trough which was the lowest level since October 2022 but is back in the red today. Similar price action for AUD/USD which bounced from its lowest level since April 2020 @ 0.6087 yesterday but struggling to hold above the 0.62 mark.

04 Feb 2025 - 09:55- ForexEU Research- Source: Newsquawk