USD: Learning to live with the tariff threat – ING

The weekend saw the US successfully use the threat of import tariffs against Colombia to secure its policy aim of returning illegal immigrants. The use of tariffs as a policy lever now looks well understood by the market and perhaps will be worth decreasing marginal volatility, ING's FX analyst Chris Turner notes.

DXY can drift back to the 108.50/108.80 area

"The FX market is still operating off a potential 1 February deadline for tariffs against Mexico, Canada and China – and that may prevent the dollar from correcting too much further this week. Instead, focus could shift back to the macro side given a whole host of central bank rate meetings, fourth quarter GDP data and some key inflation prints around the world."

"On balance, we think that Wednesday's FOMC meeting should not prove a negative event risk for the dollar in that US activity data has been pretty strong. The bigger risk to the dollar could come from Friday's release of December's core PCE inflation reading. Here, a 0.2% month-on-month reading could suggest inflation is less worrisome than some have feared and see market pricing for this year's Federal Reserve easing cycle shift to 50bp from the current 43bp."

"We suspect investors are reasonably comfortable running long USD positions at the moment and would not be surprised if DXY drifted back to the 108.50/108.80 area in quiet markets. Expect lots of focus on US equity markets this week, too. A lot of the big tech stocks are releasing fourth-quarter earnings results at a time when Chinese AI firm Deepseek is starting to question whether such a huge amount of investment is required to achieve the same results. This questions the barriers to entry currently being enjoyed by the US tech stocks."