Tariff Uncertainty Lingers as Markets Navigate Policy Shifts
Hopes for trade stability were short-lived as the U.S. granted only a temporary reprieve in its tariff standoff with Mexico and Canada, delaying new levies by a month. While this provided brief relief to markets, the broader uncertainty surrounding U.S. trade policy remains a key risk. Meanwhile, tensions with China have escalated further—after a planned call between Xi and Trump failed to materialize, the U.S. proceeded with a 10% tariff on Chinese imports, prompting Beijing to retaliate with additional levies on 80 products, effective February 10th. All eyes will be on the yuan as Chinese markets reopen after the Lunar New Year break, with traders anticipating a stable or stronger fixing from the People’s Bank of China.
In 2023, China’s exports to the U.S. were valued at around $500 billion, while U.S. exports to China amounted to approximately $124 billion. This trade imbalance has been a key point of tension in U.S.-China economic relations, and the imposition of trade tariffs is likely to escalate the issue. However, given the disparity in exports, China must adopt a measured approach in its response.
The deepening trade rift is adding pressure on the Eurozone, which finds itself caught between the world’s two largest economies. With significant trade links to both, the region faces mounting economic risks.
Despite the uncertainty, the euro found some support as the delay in tariffs for Mexico and Canada spurred buying interest, pushing EUR/USD above $1.0350. While the currency pair is slightly higher on the year, it remains down 3.5% over the past 12 months and 7.3% over the last five months.
On the economic front, today’s stronger-than-expected Eurozone inflation data challenges market expectations of aggressive ECB rate cuts. Inflation accelerated for a fourth straight month, reaching 2.5% in January 2025, while core inflation held firm at 2.7%, exceeding forecasts.
Pound Under Pressure as Growth Concerns Mount and BoE Rate Cuts Loom
The British pound remains on the defensive as weak economic data, persistent inflation worries, and shifting Bank of England (BoE) expectations weigh on market sentiment. While the BoE has maintained a cautious stance, investors are increasingly pricing in rate cuts later this year amid signs of slowing economic growth. Recent data has offered little support for sterling, reinforcing concerns that the UK economy is struggling to gain traction.
Economic indicators continue to highlight softening demand. The latest S&P Global/CIPS UK Services PMI inched up to 51.2 in January from 51.1 in December, slightly exceeding expectations of 50.9. While this suggests modest expansion in the services sector, a drop in new orders for the first time in over a year raises concerns about future momentum.
Despite these headwinds, the pound has regained some ground following the U.S. decision to delay tariffs on Canada and Mexico, which helped ease broader market uncertainty. The UK’s lower exposure to U.S. tariffs, due to its services-heavy export mix, has provided some relief. As a result, GBP/EUR is climbing for a third straight session above €1.20, though GBP/USD remains under pressure, struggling to sustain gains above $1.25.