Sovereign International Daily Market Report
US dollar retreats as Trump softens stance on tariffs
The grand inauguration of President Trump has come and gone, with markets left guessing as to the substance of one of his key policy pledges.
Highlights:
Without question the main focus of investors in the build up to his swearing in ceremony was whether Trump would shed more light on the details of his tariff proposals. Yet, those that were bracing for the unveiling of some grandiose protectionist policies on his first day in office were left with a feeling of disappointment, as his first batch of executive orders failed to provide clear details on the extent of possible tariffs.
Rising bets that these tariff plans are both lower down on the priority list, and may be watered down relative to his campaign pledges, has buoyed risk currencies so far this week. Almost every currency globally has rebounded against the US dollar in the past few days in the hope that Trump’s trade policies would perhaps have less of a negative impact on global growth than previously feared.
Speculation remains rife, however, and communications from Trump on the matter will continue to be closely watched in the coming days. In the meantime, attention turns to this afternoon’s PMI numbers out of the US economy.
USD
The lack of clarity provided by Trump with regards to his plans for trade has weighed on the US dollar so far this week, with the greenback trading lower on all G10 currencies. So far, Trump has only gone so far as to moot the idea of placing 25% duties on Canada and Mexico and tariffs of only 10% on all Chinese imports - the latter would be considerably lower than the 60% he proposed during his campaign trail. This has left investors with the feeling that not only are his tariff plans likely lower down on the priority list, but they may end up being far less aggressive than initially feared.
Markets will temporarily shift their focus this afternoon, with attention to turn back to economic data. The preliminary PMI figures for January will be out at 14:45 GMT, and are expected to point to another healthy month of growth in US business activity.
EUR
The euro has had a very good week so far, with common currency briefly rallying up this morning. The prospect of a softer stance towards trade protectionism from President Trump is a clear bullish signal for the euro given the common bloc’s high dependence on external demand (the export to GDP ratio is above 50%), particularly from the US and China.
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A more buoyant set of business activity PMI figures has provided the euro with a fresh leg up. The flash composite index from S&P jumped back above the level of 50 for the first time August in January. This follows a surprise to the upside in the manufacturing sector and a modest miss in the services index.
GBP
Sterling has risen on the US dollar so far this week to its highest level in over two weeks. While much of the move has been driven by broad dollar weakness, a slightly more upbeat set of PMI figures out of the UK this morning has partly helped GBP on its way upwards. The composite index jumped in January according to the preliminary estimate, well above the forecast and its highest level in three months.
While the above is undoubtedly a source of encouragement, the still relatively fragile growth outlook, concerns over sticky inflation and the blow up in gilt yields remain major near-term downside risks for the UK currency, which remains by far the worst performer in the G10 so far in 2025. There will be no major data releases in the UK next week, so expect the GBP/USD exchange rate to trade almost exclusively on the latest headlines out of the recently elected Trump administration.
Economic Calendar - 24/01/2025
Friday (24/01)
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