CAD
Two factors should be top of mind for loonie traders this week – tariff risks and monetary policy. Regarding the former, events over the weekend should serve as a warning shot. We see only limited tariff risks priced into USDCAD at present, and Trump has threatened a 25% import levy on Canadian goods starting on Saturday. More to the point, given the events on Sunday, we think traders should be taking these threats far more seriously. If they do, then this should be a significant weight on the loonie through the course of this week. The BoC looks likely to add to this dynamic as well. A rate decision looks close to certain, while downside risks to the economy warrant the BoC offering a more dovish steer than seen in December, both of which should help support USDCAD upside.
USD
The dollar starts the new week trading on the front foot, with tariffs once again the top story for FX markets. Admittedly, the lack of day-one implementation saw the greenback soften last week. Our base case remains that tariffs are coming, however, and are likely to be a key policy tool for the new administration, a fact that we think has been overlooked by markets. We believe events over the weekend add to this view. Specifically, Trump announced a 25% levy on imports from Colombia yesterday evening, alongside other measures, in response to a decision by the Colombian government that saw two US military planes carrying deportees, refused permission to land. This is interesting, on two counts. First, that tariffs were the first tool in the box that the new US administration reached for. Second, the Colombian government seemingly caved to US demands within a matter of hours. Taken together, this shows not only a willingness to use tariffs as a primary policy tool. But Trump is likely to be emboldened when considering future usage, given just how effective yesterday’s announcement was at achieving his desired outcome. A light data calendar through the first half of the week, should keep these facts front and centre for traders, in our view warranting a stronger dollar. Later in the week, however, an FOMC meeting, Q4 GDP readings, and earnings for Tesla (NASDAQ:TSLA), Meta (NASDAQ:META), Microsoft (NASDAQ:MSFT), and Apple (NASDAQ:AAPL), will give traders plenty of additional distractions.
EUR
Considering market perception around US tariff risks, it is unsurprising to see the euro trade softer this morning. A slow grind lower has so far seen EURUSD slip 0.3%, but the pair remains well above 1.04, leaving valuations continuing to scan as rich to us. On the data front, IFO expectations data today, followed by flash inflation and GDP data later in the week should offer plenty to keep euro traders busy. But an ECB rate decision on Thursday should be the main event of the week from a eurozone perspective. A 25bp rate cut looks like a done deal, which should keep markets focused on any forward guidance. Granted, Lagarde is typically reticent when it comes to offering a concrete steer to markets, suggesting an uneventful press conference is the most likely outcome. But if she does decide to give an indication on the direction of travel, we are inclined to think it will tilt dovish at the margin given looking at tariff risks, keeping EURUSD risks skewed to the downside later this week if we are right.
GBP
While price action this morning has seen sterling largely follow the euro lower against the dollar, the key event for the pound is not likely to be data or central bank-related. Rather, a speech by Chancellor Rachel Reeves that is scheduled for Wednesday, could well be administration-defining. Reeves is expected to announce a series of measures designed to boost economic growth, with a significant focus on infrastructure and planning reform. Given the less-than-enthusiastic response from markets to last October’s budget, screw up this week’s speech and Reeves could well burn through what little goodwill is left across markets, and potentially be out of a job. That said, we are a little more optimistic than many, despite the Chancellors’ underwhelming performance to date. Announcements last week suggested that Reeves has become increasingly willing to take decisions that are politically difficult, but economically beneficial. The devil is of course going to be in the detail, and in the government’s ability to craft a convincing message. But ahead of the event, we see the balance of risks skewed toward being pleasantly surprised – an outcome that should help the pound claw back some recent losses against the euro later this week.
This content was originally published by our partners at Monex Canada.