Dollar gains following Trump's tariff threats

Financial markets were reminded of the unpredictable landscape under President Donald Trump when initial relief over the absence of sweeping tariffs on all trade partners shifted to concern. Trump pledged to impose tariffs on Mexico and Canada within weeks.

The dollar initially opened lower but rallied after Trump threatened to implement tariffs up to 25% on imports from Canada and Mexico starting February 1. US stock futures fluctuated as traders assessed the implications of these limited pledges for inflation. Chinese stocks saw gains amid no announcements concerning China, though analysts cautioned against drawing too many conclusions from Trump’s first day in office.

European stocks remained stable, yet car manufacturers — which are particularly vulnerable to tariffs — saw declines of nearly 1%. Vestas Wind Systems A/S and Orsted AS fell sharply after Trump ordered a halt on offshore wind-power projects, with Orsted announcing a $1.7 billion impairment on its US projects.

UK employment drop strengthens BOE rate cut predictions

Employment in the UK significantly decreased following Labour’s first budget, which raised payroll taxes, increasing the argument for the Bank of England (BOE) to lower interest rates further. According to tax record data, the number of employees on payroll reached its lowest point in over a year, decreasing by 47,000 in December—the largest decline since late 2020 during the Covid restrictions. This marks a second consecutive drop, raising concerns that Labour’s £26 billion ($31.9 billion) increase in employers’ national insurance is leading to job cuts among businesses.

The signs of a weakening labor market are troubling for Chancellor of the Exchequer Rachel Reeves; however, they may set the stage for the BOE to implement a third rate cut in just over two weeks. Additionally, separate data indicated that wage growth accelerated in the three months leading up to November, although analysts noted strong base effects impacting these figures.  

Kazimir from the ECB predicts three to four additional rate cuts starting next week

The European Central Bank is likely to announce an interest rate reduction next week, with Governing Council member Peter Kazimir suggesting that two to three further cuts may follow. On Monday, Kazimir indicated that recent data supports continuing with quarter-point, consecutive rate reductions. However, he noted that the ECB must stay flexible due to increased uncertainty.

“Three or four successive cuts are achievable, yet I must emphasize that we cannot guarantee it,” the Slovak official remarked. Regarding next week, he stated, “Personally, I believe the decision is finalized.”

Many of Kazimir’s colleagues have expressed similar sentiments before the ECB’s first policy meeting of 2025, with economists and traders fully backing this action. Nevertheless, a discussion is intensifying about the speed and extent to which borrowing costs should decrease.

While some express concerns that a weaker euro might contribute to persistent inflation risks, others are worried that a too stringent policy could hinder the disinflation process too drastically.

DXY below 109.0

The US Dollar index declined following the reports that Trump refrained from imposing immediate tariffs on China, declining to as low as 108.0 before rising earlier today towards 108.70 as Trump announced a plan to impose 25% tariffs on Mexico and Canada starting next month.

In the meantime, the key support remains at 108.0, which should be watched closely as a break below that support would pave the way for a deeper correction towards 107.35 for now. On the upside view, the first immediate resistance stands at 109.0.

Gold trading strong above $2700

Gold has risen further, currently trading above $2720, marking its highest price since November 6 of last year. Traders appear to be hedging against Trump’s presidency by purchasing gold. The upward momentum is gradual, with $2750 emerging as the next key level, particularly if gold closes above $2720 in today’s trading session. On the downside view, the key support remains at $2700.

Prepared by Nour Hammoury, Chief Market Analyst at SquaredFinancial
Nour is an investor, independent market strategist, and financial advisor. He holds a BA in Finance and Banking Science from Al-Ahliyya Amman University and a CFTe in Economics from the International Federation of Technical Analysts. He has more than 15 years of experience in forex, stocks, and global economic developments, as well as central bank policies and intermarket analysis. He appears regularly on major international TV networks, such as BBC, Al-Jazeera, Al Hurra, CNBC, and Bloomberg, holding open discussions and sharing insights and readings of the markets and trends.

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