USD volatility as headlines jolt FX markets

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USD: Initially rallied as Trump’s tariff headlines jolted currency markets, but the move faded as Mexican and Canadian tariffs were delayed by one month. EUR/USD sank to 1.0200 levels, only to recover to Friday’s level of 1.0400 by this morning. We have plenty more to digest as the US prints Services and Employment data today, alongside plenty of Fed speakers trying to outline US rate policy direction. The big one will be Friday’s employment data, as recent statistics are suggesting a slower US labour market. We can expect continued volatility as Trump continues to shake global markets.

EURO:  Last week saw the ECB cut interest rates by 0.25% as expected, trying to revive a slow economy but also trying to combat sticky inflation.  Trump is suggesting that he will implement tariffs on the EU soon, and this is sure to temper any rally in the currency. ECB member Guindos this morning suggests that inflation is reaching the ECB target, but warned of the threat to stability of any tariffs.

GBP: Tomorrow, the BoE is almost certain to reduce its key borrowing rates by 25 basis points (bps) to 4.50%, with an 8-1 vote split. This would be the third interest rate cut by the BoE in its current policy-easing cycle. As one of the only currencies NOT to have been mentioned by Trump, GBP is an out-performer this week - GBP/EUR above 1.2000 and GBP/USD near 1.2500 which is where it opened on 1st Jan25.  Decent inflation data and weaker Retail Sales support a rate cut this week.