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US Dollar Strengthens as Tariff Tensions Escalate

3 February 2025

Weekly Market Headlines:

The US dollar strengthened across the board overnight following a series of tariff announcements from Canada, Mexico, and President Trump over the weekend, reigniting fears of an all-out trade war. In response to retaliatory threats from Mexico and Canada, Trump swiftly escalated the situation, promising additional 25% tariffs on their goods.

  • EUR/USD fell over 1% on opening this morning after Trump confirmed that tariffs on EU goods would “definitely happen”, though no timeline has been set.
  • The euro weakened across the board following these comments, as traders priced in the prospect of further pressure on an already fragile European economy.
  • GBP/USD slumped nearly 1.2% on opening, raising concerns of further declines. This comes despite rumours that discussions with Starmer have been progressing well, although Trump suggested he had been “out of line.”
  • On Thursday, traders will closely watch European Retail Sales, followed by the Bank of England’s policy decision in the afternoon, where a 25bps rate cut is expected. The focus will be on the BoE’s rhetoric regarding future rate policy, as well as their outlook on recent turmoil in UK bond markets and the depreciation of Sterling.

Currency markets remain highly volatile following the weekend, with further uncertainty expected ahead of Thursday’s key Bank of England meeting. To discuss strategies on how Lumon can support your currency needs and help mitigate risk, please reach out on +44 (0) 203 384 7280 to your dedicated currency specialist—we would be happy to assist.

What’s happening this week?

GBP

  • Thursday: Interest rate decision

EUR

  • Thursday: Eurozone retail sales