Dollar Soars on Tariff Announcement; Hammering the Euro and Canadian Dollar
GBP
GBP/USD has tanked this morning and is currently trading at 1.2295 (interbank), while GBP/EUR has risen to 1.2010 (interbank).
British factories reported another tough month in January as output as the S&P Global Purchasing Managers' Index for UK manufacturing remained below the 50-mark that divides growth from contraction for a fourth month in a row. There was a slight easing in the pace of contraction as the index rose to 48.3 in January from 47.0 in December - a fraction above a preliminary estimate for January of 48.2.
Furthermore, U.S. President Donald Trump indicated on Sunday that the UK might be able to dodge tariffs, despite being "out of line" in terms of trade. He expressed optimism about resolving the trade imbalance with Britain, stating, "I think that one can be worked out."
The main focus this week will be on Thursday where the BoE hosts a policy-setting meeting later this week, which could see the central bank cutting interest rates in order to stimulate the moribund economy.
Trades are confident that the BoE will reduce interest rates by 25 basis points (bps) to 4.50%.
Today’s events (GMT):
09:30 - Manufacturing PMI (Jan) - Actual: 48.3 vs Forecast: 48.2
EUR
EUR/USD has dropped 1.1% to 1.0231, with the euro hitting its lowest level since November 2022 as markets brace for potential US tariffs on European exports.
The European Central Bank cut interest rates by 25 bps last week—its fifth reduction since June—amid expectations that inflation is easing and the struggling eurozone economy requires further stimulus.
Eurozone inflation rose slightly in January, with the Harmonized Index of Consumer Prices (HICP) increasing 2.5% YoY, up from 2.4% in December and in line with market expectations. Core HICP held steady at 2.7%, surpassing the 2.6% forecast. However, on a monthly basis, overall inflation fell 0.3%, while core HICP dropped 1.0%, signalling continued economic fragility.
Furthermore, Germany’s Manufacturing PMI increased to 45.0 in January from 42.5 in December, marking its highest level since May 2023. However, despite this improvement, the reading remains well below 50, indicating continued contraction in the sector.
In an interview with the BBC, President Trump confirmed that tariffs on EU goods "will definitely happen", describing the $200 billion US trade deficit with the bloc as "an atrocity".
Today’s events (GMT):
08:55 - German Manufacturing PMI (Jan) - Actual: 45.0 vs Forecast: 44.1
09:00 - Manufacturing PMI (Jan) - Actual: 46.6 vs Forecast: 46.1
10:00 - Core CPI (Jan) - Forecast: 2.6%
10:00 – CPI (Jan) - Forecast: 2.4%
USD
The Dollar Index has surged 1% to 109.548, hitting a near one-month high and approaching levels last seen in January 2022.
The Federal Reserve’s preferred inflation gauge, the PCE Price Index, rose as anticipated in December, reinforcing expectations that interest rates will remain elevated for longer.
Investor sentiment remains cautious as President Trump formally signed an executive order on Saturday implementing tariffs on imports from Canada, Mexico, and China. All three nations have signalled possible retaliatory measures, heightening fears of a global trade war.
The US tariffs, which take effect tomorrow, will see a 25% duty on Canadian and Mexican goods and 10% on Chinese imports. However, in an effort to shield domestic energy prices, Canadian energy imports will be subjected to a lower 10% tariff. Trump also warned that further retaliation could see tariffs increase further.
Markets will be watching today’s ISM Manufacturing PMI, which will provide further insight into the health of the U.S. economy.
Today’s events (GMT):
14:45 - Manufacturing PMI (Jan)- Forecast: 50.1
15:00 - ISM Manufacturing PMI (Jan) - Forecast: 49.3
17:30 - FOMC Member Bostic Speaks
CAD
USD/CAD has climbed to 1.4690 (interbank) as investors seek refuge in the safe-haven US dollar amid trade tensions and weaker equity markets.
The Canadian dollar has plummeted to its lowest level in over two decades, last seen in April 2003, as President Trump’s tariffs weigh heavily on investor sentiment.
Prime Minister Justin Trudeau responded to Trump’s trade measures by announcing C$155 billion (€102.8 billion) worth of retaliatory tariffs on US goods, including agriculture, alcohol, consumer goods, and raw materials. Duties on C$30 billion (€19.9 billion) of these goods will take effect immediately on Tuesday. However, analysts warn that these tariffs could push Canada into recession, marking the country’s first economic contraction since the pandemic.
Adding to CAD’s woes, the Bank of Canada slashed interest rates for the sixth time since June and ended its quantitative tightening programme, further weighing on the currency.
Markets will closely monitor BoC Governor Tiff Macklem’s speech on Thursday, as well as Canada’s employment data on Friday.
Meanwhile, oil prices have jumped following Trump’s sweeping tariffs on Canada, China, and Mexico. Brent crude is up 0.6% at $76.13 per barrel, while West Texas Intermediate (WTI) has climbed to $72.75 per barrel.
No significant events are scheduled for today.
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