Market Response to Trump's Tariff Threats

Source: CNBC

GBP/USD falls 0.16% to 1.2398, continuing its decline as Trump threatens tariffs on Canada and Mexico.

US inflation aligns with expectations, Core PCE Index rises 0.2% MoM; Fed's rhetoric supports dollar strength.

US Dollar Index (DXY) climbs 0.20%, reflecting gains against major currencies, including the Pound.

The Pound Sterling extended its losses for the second consecutive day as US President Donald Trump tariffs rhetoric sent ripples across the financial markets. Therefore, the Greenback remains bid, as economic data takes the backseat. The GBP/USD trades at 1.2398, down 0.16%.

GBP/USD dips amid heightened US trade tension, persistent UK economic concerns.

On Thursday, Trump reiterated that he will impose tariffs on Mexico and Canada, which lent a lifeline to the US Dollar, which was posting losses before ending the day in the green. Most G10 Forex currencies, depreciated, including Sterling.

Worries about an economic slowdown in the UK kept the GBP pressured amid concerns on the budget presented by chancellor Rachel Reeves.

In the meantime, inflation in the United States (USD) rose in December. The Core Personal Consumption Expenditures (PCE) Price Index, the Federal Reserve’s (Fed) preferred inflation gauge increased by 0.2% MoM as expected, up from November 0.1%. On an annual basis, the underlying PCE remained unchanged at 2.8% as projected.

Fed speakers are also providing some support for the US Dollar, as Governor Michelle Bowman said that inflation risks are tilted to the upside. At the time of writing, Chicago’s Fed President Austan Goolsbee added that he liked December’s inflation report, stating that he’s comfortable that inflation is on the path to 2% target.

The data maintained the “status quo.” US equities continued to trend higher, and the buck gained some traction, as the GBP/USD dropped from around 1.2430 to 1.2408.

The US Dollar Index (DXY), which tracks the buck’s value against a basket of six currencies, is rising 0.20% up at 108.41. The US 10-year Treasury bond yield drops one and a half basis points to 4.50%, after the data.

GBP/USD Price Forecast: Technical outlook

Given the backdrop, the GBP/USD bias remains downwards. Following the pair’s clash at the 50-day Simple Moving Average (SMA) near 1.2500, it has trended lower, extending its fall beneath 1.2400. If Sterling weakens further, the next support would be intermediate support at January’s 23 low of 1.2292, before challenging January 17 swing low of 1.2159.

British Pound PRICE Today

The table below shows the percentage change of British Pound (GBP) against listed major currencies today. British Pound was the strongest against the Euro.

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the British Pound from the left column and move along the horizontal line to the US Dollar, the percentage change displayed in the box will represent GBP (base)/USD (quote).

Source: FXSTREET

Inventories gone wild

Manufacturing remains a major drag on growth

High inventories are likely to impact GDP negatively

Continued struggles in the first quarter

Downward pressure of retail inventories on goods inflation is petering out

Non-energy goods inflation bottoming out

Source:ING

In the mercy of tariffs

The US dollar has staged a recovery this week, corroborating the notion that the latest pullback on news that Trump may adopt a softer stance on tariffs than his pre-inauguration rhetoric suggested, was just a corrective phase.

Tariffs remained the main driver, with Wednesday’s Fed decision adding some extra fuel to the rebound. After Colombia succumbed to Trump’s threats, investors’ concerns were amplified again, with many perhaps thinking that the US President may harden his rhetoric to get what he wants from the rest of the world. And indeed, Trump himself confirmed that view after he rejected reports that US Treasury secretary Scott Bessent is pushing for only 2.5% tariffs that would be gradually lifted to 20%, saying that tariffs would be “much bigger.”

In the shadows of the first imposition of 25% tariffs on Canadian and Mexican imports on February 1, the Fed decided on Wednesday to keep interest rates unchanged. At the press conference following the decision, Fed Chair Powell acknowledged signs of progress in reducing inflation, adding though that “non-market” prices remain stubbornly high and stressing that they are in no hurry to make further adjustments. They will wait for more clarity on the economic front as well as on government policy.

From around 50bps worth of rate reductions for this year, Fed fund futures are now pointing to 45bps as investors lifted only slightly the implied rate path. The next quarter-point reduction is still nearly fully priced in by June.

Nonfarm Payrolls enter the limelight

With all that in mind, attention next week is likely to fall on the NFP employment report for January. Powell noted that further labor market weakening is not needed for the inflation target to be met as the path for continued disinflation remains intact. However, he did not mention what will happen in the case of unexpected labor market tightening.

In December, the economy added 256k jobs, with average hourly earnings ticking down, but remaining elevated close to 4.0% y/y. Another round of strong employment and wage growth could intensify concerns about a resurgence of inflation in the months to come, especially if Trump kicks off the tariff game on February 1. Market participants are likely to start doubting again whether two rate cuts will be needed this year, which could allow the US dollar to extend its latest recovery.

The ISM manufacturing and non-manufacturing PMIs on Monday and Wednesday, as well as the ADP private employment report on Wednesday will also be closely monitored ahead of Friday’s NFP data.

Will the BoE opt for a hawkish cut?

After the BoJ, the Fed, the ECB and the BoC, it will be the BoE’s turn to hold its first policy decision for 2025. Following the concerns over the sustainability of the new government’s fiscal plans, where UK bonds and the pound tumbled on fears of a Truss 2.0 budget crisis, investors became more convinced that a rate cut would be appropriate at this gathering.

Taking also into account the cooler-than-expected CPI numbers for December and the sluggish UK growth, investors are now penciling in around a 90% chance of a quarter-point rate cut at this gathering, while anticipating nearly another two by the end of the year.

That said, both the headline and the core inflation rates remain above the Bank’s objective of 2%, with the latter standing at 3.2% y/y. What’s more, although the surge in bold yields was largely reversed, the pound recovered only a portion of its losses. It is actually the worst performing major currency so far this year, posing upside risks to UK inflation.

Therefore, even if the well-anticipated rate cut is delivered, it may be a hawkish cut, with the Bank revising up its inflation projections, especially with rent inflation remaining stagnant at 7.6% y/y and services inflation still above 4.0% y/y. Officials may signal that they will take their decisions meeting by meeting, avoiding to pre-commit to any future rate cuts. This may disappoint those expecting another two reductions this year and thereby allow the pound to gain some more ground.

Will the jobs data allow the BoC to take the sidelines?

At the same time with the US jobs data, Canada releases its own employment report for January. This week, the Bank of Canada trimmed interest rates by another 25bps and revised down its growth forecasts, noting that they are concerned about US tariffs.

However, they also added that tariffs could also stoke persistently high inflation, which led market participants to pencil in around a 50% probability for policymakers to take the sidelines at the next policy gathering in March.

In other words, the BoC will find itself between a rock and a hard place and Friday’s jobs report may help tilt the scale towards a pause or another rate cut, depending on whether it will come in strong or soft.

Eurozone CPIs, NZ employment and Japan’s wages

Flying from Canada to the Eurozone, the ECB also decided to reduce interest rates this week, noting that the disinflationary process is well on track and that the economy is still facing headwinds. In the statement, it was noted that the Bank is still not pre-committing to a particular rate path. At the post-decision conference, President Lagarde said that interest rates are still in restrictive territory and that there was no discussion on whether it’s time to stop reducing rates.

The market was quick to price in around an 85% chance for another quarter-point cut in March and should Monday’s flash CPI data reveal cooling inflation, that probability could go even higher, thereby weighing on the euro. Eurozone’s retail sales are also on next week’s agenda.

Elsewhere, during Tuesday’s Asian session, New Zealand’s employment report for Q4 could prove crucial on whether the RBNZ will cut by 25 or 50bps, while the following day, Japan’s wage data for December could shape expectations about the BoJ’s next rate increase.

On the earnings front, the tech-related reporting continues with Alphabet and AMD on Tuesday, and Amazon on Thursday.

Source: ACTIONFOREX

Source: Reuters

HIT TO INDEPENDENT REFINERS

Source: Reuters