EUROPEAN FX UPDATE: USD bounces back from yesterday's selling as tariff threats loom

USD: DXY +0.7%; 108.68

• The dollar is showing a resurgence after yesterday's heavy selling pressure which was triggered by news that President Trump refrained from imposing tariffs on day one of his Presidency. That being said, optimism on the trade front was dashed overnight after Trump remarked that he is thinking of 25% tariffs on Mexico and Canada and thinks that they will do it on February 1st. Furthermore, Trump also unveiled the creation of the External Revenue Service which will be tasked with collecting tariff and duties and therefore shows that tariffs will ultimately be a part of his economic agenda. Today's docket is a light one from a US perspective and therefore trade may continue to hinge on headline trading around Trump's policy agenda in the short-term. DXY made an incremental new low overnight @ 107.86 before returning to a 108 handle and rising as high as 108.79 vs. yesterday's best @ 109.34.

EUR: EUR/USD -0.6%; 1.0356

• EUR notably weaker vs. the USD following a particularly strong showing yesterday amid relief that Trump refrained from enacting tariff action on day one of his Presidency. That optimism has faded somewhat following Trump's threats on Canada and Mexico overnight as well as him stating that the US will straighten out the deficit with the EU through tariffs or by buying US oil and gas. On the ECB front, comments from Kazimir stand in contrast to hawkish remarks yesterday from Holzmann with the former noting that a rate cut next week is all but certain and two to three more will probably follow. From a data perspective, German ZEW saw the headline economic sentiment metric post a larger than expected decline. PMIs on Friday will likely be the highlight of the week, however, the survey period will likely fail to encapsulate developments since Trump has taken office. EUR/USD currently sits towards the middle of yesterday's 1.0266-1.0434 range


• EUR/USD opex: 1.0300-05 (2.5bln), 1.0325 (5.3bln), 1.0350 (1.5bln), 1.0400 (4bln), 1.0410-20 (2.7bln), 1.0430 (630mln), 1.0450 (1.9bln).

JPY: USD/JPY +0.2%; 155.89

• JPY softer vs. the USD but to a lesser extent than peers given that more cyclically exposed currencies were hit overnight following Trump's tariff threat. Additionally, focus for JPY is on Friday's BoJ policy announcement with markets pricing a circa 86% chance of a 25bps hike. Failure to deliver on market expectations would likely pressure the JPY. However, the extent of the pressure would likely be tempered by subsequent jawboning from Japanese officials and the looming threat of intervention. USD/JPY delved as low as 154.79 overnight, finding support just above its 50DMA @ 154.77.


• USD/JPY opex: 156.00-05 (2.5bln), 156.50 (1.1bln).

GBP: GBP/USD -0.6%; 1.2249

• On the backfoot vs. the broadly firmer USD and marginally softer vs. the EUR. This morning's UK jobs data saw the unemployment rate tick higher to 4.4% from 4.3% as expected (usual data caveats apply), whilst headline wage growth picked up to 5.6% from 5.2% as expected and HMRC payrolls change printed another contraction. In response to the data, Pantheon Macroeconomics noted that the "jobs market is loosening gradually, but strong wage growth is a block to quick MPC rate cuts". As it stands, markets assign an 84% chance of a 25bps cut next month and 63bps of easing by year-end. Cable currently sits towards the middle of yesterday's 1.2161-1.2345 range.

Antipodeans: AUD/USD -0.7%; 0.6231. NZD/USD -0.7%; 0.5631

• Both on the backfoot as some of yesterday's trade optimism faded overnight following the aforementioned report of Trump considering tariffs on Mexico and Canada. AUD/USD yesterday was able to propel itself from a 0.6189 base to a 0.6286 peak (highest since 7th Jan). However, a bulk of this move was pared during the APAC session with the pair delving as low as 0.6209. Similar price action for NZD/USD which had been as high as 0.5689 before slipping to a 0.5622 low; still sits above yesterday's trough @ 0.5579.

CAD/MXN: USD/CAD +0.9%; 1.4430. USD/MXN +1.4%; 20.752

• After some reprieve yesterday, both are notably lower vs. the USD following comments from US President Trump that he is thinking of 25% tariffs on Mexico and Canada and thinks that they will do it on February 1st. ING notes that "at this point, there is more downside room for CAD and MXN to fall should Trump follow through with the tariff threat". Such a move by the US would likely trigger retaliation from Canada. Elsewhere for Canada, today sees the release of inflation data for December with headline Y/Y CPI expected to remain at 1.9%. Given tariff threats, the data will likely play a lesser role than usual. January 25bps BoC cut priced @ 82%, 59bps of easing seen by year-end. Overnight high in USD/CAD @ 1.4426 was the highest since 24th March 2020.

21 Jan 2025 - 10:20- ForexData- Source: Newsquawk