The weekend will present the first test of how serious US President Donald Trump is with his protectionism threat, as Canada and Mexico face a 25% tariff deadline tomorrow, ING's FX analyst Francesco Pesole notes.
Tariffs on Canada and Mexico to influence the USD
"Neither CAD nor MXN were fully pricing in the tariff risk when Trump reiterated his protectionism plans versus USMCA partners yesterday, and the remarks caused a CAD and MXN selloff and broader dollar rally. Markets continue to treat those threats with a dose of caution, and should we effectively see an official imposition of tariffs tomorrow, both CAD and MXN look at major downside risks."
"If Trump doesn’t deliver on his threat by tomorrow, we should see the USD depreciate not just against CAD and MXN but also with other currencies that are embedding tariff risks (like AUD, NZD, EUR). Investors’ intuition could be that Trump will only use tariffs mostly as threat for negotiations, but ultimately refrain from hitting its major partners."
"On the data side, US core PCE is released today and is expected to have accelerated 0.2% in December, although risks are skewed to a stronger print. Anyway, expect the dollar to be primarily driven by the tariff story. If by the end of today we get no news on Canada and Mexico, the risks are probably of a stronger dollar, as markets could price in a greater chance of tariffs being announced tomorrow."
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EUR/USD is trading on the back foot below 1.0400 in European trading on Friday. The pair is undermined by the increased haven demand for the US Dollar amid tariff concerns. Upbeat German Retail Sales and Import Prices data fail to impress the Euro. US PCE inflation awaited.
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GBP/USD extends the drop below 1.2600 in the European session on Friday. Tariff uncertainty from US President Trump weighs on the risk-sensitve Pound Sterling against the safe-haven US Dollar, despite prudent BoE commentary. All eyes remain on the US PCE inflation data.
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