USD: A major correction on souring US sentiment – ING

FX markets moved quite hectically yesterday, with the dollar giving up its weekly gains in a round of heavy positioning readjustment. There was a mix of triggers for the dollar correction: US President Donald Trump opened up the prospect of a US-China trade deal, US data came in softer than expected, US equities underperformed again after disappointing Walmart earnings, and the US curve flattened on the back of Treasury Secretary Scott Bessent's recent comments, ING’s FX analysts Francesco Pesole notes.

Market focus to return to the tariff story

"The first of these factors – hopes of US-China trade de-escalation – is in theory the most important for FX, but in practice Trump’s comments on trade are weighed more carefully now. Bessent will hold a first call with Chinese officials today. Direct communication with trading partners has so far led to some constructive comments by the new US administration, so we could easily see some more positive headlines on the topic today."

"Yesterday’s move in the dollar was in our view more a function of souring domestic US sentiment. Walmart’s disappointing earnings report included a more subdued tone on consumer spending, even before taking the tariff impact into account. And data is coincidentally starting to support those thinking late-2024 optimism was a blip. Yesterday, we saw the US Consumer Board Leading Index resuming its decline in January following a surprise retail sales drop for the same month."

"The dollar may be playing a slightly more forward-looking role than rates at this stage; after all, the FX market has been granted more freedom to dislocate from traditional rate correlations as Trump introduced new layers of uncertainty. The bar for a negative USD reaction to data is not high, and we admit the path to dollar re-appreciation can be bumpy. Ultimately, we expect the focus to return to the tariff story. We therefore see mostly upside risks to the dollar from this point."