Markets remain jittery amid US President Donald Trump’s continued threats to impose tariffs on Mexico and Canada. Despite repeated statements confirming that the tariffs are still under consideration, the deadline for a decision remains next Monday.
So far, investors are unable to accurately assess the risks associated with this threat, which increases the anxiety. As the days progress, currency markets are likely to react more strongly to this news.
In this context, ING strategists, led by Francesco Bisol, said in a note: “The dollar found relative stability at the beginning of the week, helped by Trump’s statement in late European trading hours, in which he confirmed that the tariffs on Canada and Mexico remain in place.”
The proposed 25% tariffs were postponed in early February, with a new date set for March 3. ING Bank indicated that President Trump may use the threat of tariffs until the last minute, in order to strengthen his negotiating position, as he did last February.
“Despite the threats, the most reasonable assumption is that the 25% tariffs on Mexico and Canada will not be imposed in the end. Markets are not seriously expecting this to happen,” the strategists added.
Given the likelihood that the FX market will take the threat seriously, the strategists see USD/CAD and USD/MXN as potential upside risks in the near term.
Meanwhile, focus is on US economic data, with the Conference Board’s consumer confidence report due out today expected to have a major impact on market sentiment. After surging in November following the US election, the index has been on a downward trend. Expectations are for another decline from 104.1 to 102.5, which could add to market jitters.
European Central Bank wage growth data
If the index falls towards 100, it could trigger a strong reaction from traders. On the other hand, the Richmond Fed’s indicators will provide further insights into economic momentum. Economic activity readings from the regional Federal Reserve Banks of Chicago and Dallas have weakened, adding to the caution.
In this regard, ING sees the dollar’s direction during the day largely dependent on future comments on tariffs from Trump or any other US official. As Pessol and his team noted: “Aside from these comments, and in terms of the market’s bias towards tariffs, we believe the dollar could face a decline today as consumer confidence disappointments increase.”
A weaker report could add to concerns about a slowdown in consumption, which could lead to a “comfortable repricing of the Fed’s outlook.”
On the other hand, markets are also watching the European Central Bank’s data on negotiated wage growth. However, ING does not expect this data to have a significant impact on the ECB’s monetary policy. Although wages rose 5.4% year-on-year in the third quarter, this increase was largely driven by one-off payments.
The ECB’s focus remains on wage trends in general. Given recent signs of a slowdown in growth, the ECB is unlikely to change its stance. Given this, ING sees the euro’s expected upside potential as limited, with EUR/USD likely to test 1.050 in the near term before heading lower towards 1.030.
Markets will remain awaiting the outcome of the tariffs, as well as the impact of future economic data. However, the near future remains uncertain amid ongoing conflicting statements and political threats.
Eurozone and the Impact of Wages on Monetary Policy
In the eurozone, markets are also watching the latest data from the European Central Bank on negotiated wage growth. However, ING does not expect this data to have a significant impact on the ECB’s monetary policy. Although wages rose by 5.4% year-on-year in Q3, this increase was largely driven by one-off payments.
The ECB’s focus remains on overall wage trends. Given recent signs of a slowdown in this growth, the ECB is unlikely to change its current stance. Given this, ING sees the expected upside for the euro as limited. In the near term, the EUR/USD pair is likely to test the 1.050 level, before heading lower towards the 1.030 level.
Global Markets Under the Influence of Political Uncertainty
Overall, global markets remain in a state of anticipation and concern, due to the ongoing political and economic uncertainty caused by current US policies. The dollar is under pressure from contradictory statements on tariffs, while markets are looking for signals on US economic stability. In this climate, it becomes difficult for investors to accurately determine future trends.
For other markets, especially in the eurozone, concerns about slowing economic growth remain. Although the economic situation in Europe shows some relative stability, financial conditions may be subject to volatility based on developments coming from the United States.
With increasing political and economic pressures, currency markets are expected to remain volatile. The ongoing threat of tariffs on Mexico and Canada could significantly impact the movement of the dollar and commodity markets. In contrast, US economic data is likely to play a pivotal role in steering financial markets.
