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Dollar pull back gather speed as tariff threat fades

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27 January 2025

Written by
Matthew Ryan

Matthew Ryan is Ebury’s Global Head of Market Strategy, based in London, where he has been part of the strategy team since 2014. He provides fundamental FX analysis for a wide range of G10 and emerging market currencies.

A “tariff relief” rally has gathered some speed, as Trump’s furry of initial activity and executive orders seems for now to be focused elsewhere, and markets hope that their worst fears on this front will not be realized.

The rally in almost every major currency against the dollar was led by the pound among G10 countries and Latin American ones among emerging markets. This latter move will be tested soon by the announcement of tariffs targeting specifically Colombia in retaliation for Colombian president Petro turning away migrant repatriation flights from the US over the weekend. The spat is a reminder that the situation is very fluid and that Trump’s decisions can have as much or more market impact as a key economic decision or a Federal Reserve rate move.

This week was originally going to be dominated by the January meetings of the two most important central banks in the world, the Federal Reserve and the ECB, However, the mercurial Trump administration is liable to steal the spotlight at any moment with a sudden tariff decision. We will stick to predicting the predictable, and in this case there is little doubt about the outcome of both central bank meetings: a cut from the ECB and no change from the Fed. The key to both meetings for markets will be the tone of communications accompanying the decision.

GBP

Macroeconomic news flow turned positive for Sterling last week. A solid labor report was followed by an encouraging uptick in the PMI indices of business activity for January, a key leading indicator. Both the manufacturing and the services subindices posted significant gains, and the composite index is now consistent with solid if unspectacular economic growth. The pound reacted well to the news, posting solid gains against every single G10 currency to end at the top of the currency table for the week. An attractive valuation, the prospect for continued demand growth, plus a better relationship with the European Union and relative isolation from the threat of Trump’s tariffs are all significant positives for the Pound at these levels.

EUR

The Eurozone also saw an improvement in the PMI indices last week, albeit a more moderate one. However, it was enough to push the composite index just above the 50 level, back to signalling slight growth. The increase is a slight one, but market positioning and consensus for a stronger dollar is so widespread that even the tenderest green shoots in Europe are enough to bring about significant countertrend moves, and the Euro is now up for the year against the dollar. The key for the Euro is now the ECB meeting on Thursday. While a cut is expected, we will be paying close attention to the Council communications and president Lagarde´ s press conference for hints on what the ECB members see as a likely terminal level for interest rates in this cutting cycle.

USD

The holiday shortened week in the US yielded little to change our macroeconomic forecasts in either direction, though a weaker than expected PMI index release did help currencies worldwide rally against the US dollar. However, fear of Trump’s tariffs remains the main driver of currency markets. For now, the onslaught of executive orders has yet to result in any tariff increases, which has calmed nerves somewhat. As this is written, it looks like Colombia will be hit by tariffs unless its government relents and accepts US repatriation of its citizens, so the dollar has started the week on the front foot.

 

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