02/04/2025 Market Watch

Markets Brace for U.S. Tariff Decision as Uncertainty Lingers

Markets are cautiously awaiting a U.S. tariff announcement expected today, with no final decision confirmed even as of yesterday. The potential changes could impact global trade, inflation, interest rates, and overall market sentiment. At the same time, asset prices across currencies, equities, bonds, and commodities are showing signs of hesitation, with some regional divergence in performance.

Despite internal debate, the U.S. is likely to pursue a straightforward tariff structure—either a uniform levy or a dual-tier system with high and low rates. Earlier suggestions by Treasury Secretary Bessent to limit tariffs to just a few countries now appear unlikely, as he seems to have lost influence in the decision-making process. These tariffs are expected to push up prices and potentially slow economic growth. However, it is not lower inflation but a weakening labor market that may prompt the Federal Reserve to cut rates again.

The U.S. dollar is under pressure against most major currencies, especially the Antipodean pairs. It remains steady against the euro, yen, and sterling. Emerging market currencies are mostly stronger. Asian equity markets showed mixed performance, with smaller indices outperforming larger ones. In Europe, the Stoxx 600 is reversing nearly all of yesterday’s gains, and U.S. futures are trading lower.

Bond markets reflect a mixed outlook: Japan’s 10-year yield has fallen to a one-month low, while U.S. and European yields remain steady to slightly higher. The U.S. 10-year yield is holding near 4.17%, well below last week's high of 4.80%. In commodities, gold is showing a slight upward bias, trading near $3130. Oil remains steady, with May WTI just above $71 after briefly topping $72 and finding support at $70.70 earlier.

United States of America

Overview

All eyes are on the upcoming U.S. reciprocal tariff announcement expected around 4 PM ET today. With markets already showing caution, the decision is likely to shape the next wave of moves in currencies, equities, and rate expectations. Broader concerns also linger around the logic behind the tariffs—whether they’re intended to generate revenue or protect domestic industries—since the two goals seem at odds with each other.

Economic Drivers

The current tariff strategy reflects an internal contradiction. If the aim is to raise government revenue, higher import prices shouldn’t reduce demand. But if the goal is to shift consumption toward domestic goods, then long-term revenue from tariffs will likely decline. This dual intention adds complexity to the market’s interpretation of the policy’s impact on inflation and economic growth.

• Tariffs aimed at boosting revenue require continued import demand.
• Tariffs aimed at reducing imports could lower revenue over time.
• Rising trade tensions may influence monetary policy outlook.
• Import costs may contribute to inflationary pressures, affecting real income and consumption.

Data and Events

Several key economic releases and events could trigger market moves this week. While today's ADP jobs estimate and factory orders matter, markets are more focused on upcoming high-impact events tied to labor and services sectors, as well as forward guidance from the Fed.

1. ADP Private Sector Employment Report (Today): Provides an early look at private hiring trends ahead of Friday’s official jobs report.
2. February Factory Orders (Today): Indicates the health of the manufacturing sector and business investment.
3. ISM Services PMI (Thursday): Offers insight into the service economy, which makes up the majority of U.S. GDP.
4. Nonfarm Payrolls (Friday): The most significant labor market indicator; could shape expectations for Fed policy.
5. Fed Chair Powell’s Speech (Friday): Markets will watch closely for any signals about the economic outlook or potential changes to the interest rate path.

Price Action

The Dollar Index remains in consolidation mode, trading between Monday’s range of 103.75–104.40. It’s currently holding above 104.00, but it needs a decisive break above last week’s high near 104.70—and potentially above the 200-day moving average at 104.90—to confirm upward momentum. Conversely, a move below 103.75 would be seen as technically significant. These levels are key to watch as markets digest both tariff news and incoming economic data.

Key Points:

• U.S. tariff response expected at 4 PM ET today.
• Conflicting tariff goals (revenue vs. import substitution) create economic uncertainty.
• Markets eye Powell’s speech and key labor data for Fed direction.
• Dollar Index must break out of current range to signal next move.
• Today’s ADP and factory data matter, but NFP and ISM are more critical.

Australia

Overview

The Australian dollar continues to trade within a defined two-cent range between $0.6200 and $0.6400, extending a modest recovery toward the middle of that band. Despite testing technical resistance, the currency lacks strong directional conviction. With the Reserve Bank of Australia (RBA) meeting now behind us, the upcoming domestic data is expected to have limited influence. Market attention is shifting toward key political and monetary policy dates, along with broader global developments such as U.S. trade policy.

Economic Drivers

The Australian dollar's movement remains fundamentally tied to broader risk sentiment and expectations surrounding both domestic and U.S. policy. However, the local landscape is currently quiet, with the focus turning to future developments.

• The RBA meeting is complete with no major surprises.
• Domestic data, including building approvals, trade figures, and household spending, are unlikely to shift market sentiment significantly.
• The upcoming federal election (May 3) introduces potential policy uncertainty.
• A possible RBA rate cut is anticipated on May 20, which may reintroduce volatility.

Data and Events

While the immediate data flow from Australia is expected to be low-impact, several scheduled releases and key political events may influence positioning and sentiment as they draw closer.

1. Building Approvals (Today): Released but seen as low impact in current context.
2. Trade Balance (Thursday): Provides insight into export momentum but not expected to alter expectations.
3. Household Spending (Friday): May help gauge consumer strength but unlikely to shift policy outlook.
4. Federal Election (May 3): May bring shifts in fiscal policy and regulatory stance.
5. RBA Policy Decision (May 20): A rate cut is widely speculated, which could influence AUD direction.

Price Action

The Australian dollar is currently testing its 20-day moving average near $0.6310, recovering slightly after touching the lower end of its $0.6200–$0.6400 range. However, historical patterns suggest that betting on breakouts at the edges of this range has been unprofitable so far this year. The pattern favors patience, as false breaks have been common and range-bound trading persists unless confirmed by stronger catalysts.

Key Points:

• AUD remains confined within $0.6200–$0.6400, testing mid-range and technical resistance.
• Breakout trades have been unreliable; range is expected to hold for now.
• Domestic data this week is unlikely to shift sentiment meaningfully.
• Market focus is turning to May’s election and RBA’s potential rate cut.
• Global factors, especially U.S. tariffs, remain key external influences.

Canada

Overview

The Canadian dollar weakened sharply against the U.S. dollar, slipping from a recent high of CAD1.4415 to a three-day low near CAD1.4290. While the move reflects immediate price action, the deeper concern lies in mounting uncertainty. A growing sense of economic and political unease is dampening business and consumer confidence, casting a shadow over Canada’s modest growth outlook. Tensions with the U.S., particularly following a high-profile call between leaders, and domestic controversies—such as Canada’s move to ban Tesla from its EV subsidy program—are contributing to the pressure.

Economic Drivers

Canada’s underlying growth outlook is being challenged by both internal and external forces. While recent data has yet to reflect it, economic momentum is under threat.

• Consumer and business confidence is falling, driven by rising uncertainty.
• Diplomatic friction with the U.S. is straining trade relations and political goodwill.
• A chill in sentiment may delay investment and hiring decisions, threatening short-term growth.
• Canada's decision to exclude Tesla from its EV subsidy program highlights regulatory friction and may affect future consumer incentives and innovation.

Data and Events

Although current high-frequency indicators remain stable, they are not yet capturing the full extent of emerging risks. However, recent developments point to rising political and regulatory concerns.

1. Tesla EV Subsidy Ban (This Week): Canada has excluded Tesla from its electric vehicle rebate program after a surge in last-minute sales claims, prompting a formal investigation.
2. Loss of Consumer and Business Confidence (Ongoing): Recent surveys indicate declining sentiment, which may not yet appear in standard economic releases.
3. U.S.-Canada Diplomatic Tensions: The recent Trump-Carney conversation, while civil, marks a shift away from earlier cooperation, reflecting longer-term deterioration in cross-border ties.

Price Action

The U.S. dollar climbed to CAD1.4415—its highest level since mid-March—before retreating to CAD1.4290. This reversal suggests near-term resistance and highlights the loonie’s sensitivity to shifts in sentiment. While the Canadian dollar regained some ground, the broader trend reflects vulnerability, especially in the absence of clear domestic momentum or stabilizing news.

Key Points:

• USD/CAD hit a mid-March high before retreating to a three-day low.
• Canada’s economic outlook is clouded by declining confidence and rising uncertainty.
• Diplomatic friction with the U.S. adds political risk.
• Tesla’s EV subsidy ban fuels controversy and regulatory scrutiny.
• Market sentiment may continue to weaken unless positive catalysts emerge.

China

Overview

The yuan continues to weaken against the U.S. dollar, with both offshore and onshore pairs approaching multi-week highs. Despite steady economic data, rising geopolitical tensions—particularly new U.S. tariff threats—are fueling market caution. The People's Bank of China (PBOC) has been adjusting its daily fixings in a tightly managed pattern, but these moves have not prevented the yuan's decline. Broader concerns over trade, energy policy, and cross-border investment are creating an unstable backdrop for China’s currency.

Economic Drivers

China’s currency is currently influenced more by geopolitical pressures than domestic economic indicators. The market is discounting stable PMI readings and focusing on risks tied to international trade and investment.

• The PBOC is alternating the daily USD/CNY fix between higher and lower levels, suggesting deliberate currency management.
• China’s measured response to earlier U.S. tariffs is giving way to rising friction as new secondary tariffs target energy trade.
• The U.S. is threatening tariffs on countries importing Russian oil—specifically mentioning China and India.
• The potential Chinese block of C.K. Hutchison’s port deal with Blackrock is another flashpoint for U.S. criticism.

Data and Events

Recent data releases in China have been steady but not market-moving. Political developments, however, are dominating the narrative and creating the potential for increased volatility.

1. Caixin March Services PMI: 51.5 (slightly above 51.4 prior).
2. Caixin March Composite PMI: 51.6 (up from 51.5).
3. PBOC USD/CNY Fixing: Set at CNY7.1793, the highest since January 2021.
4. U.S. Secondary Tariffs: Targeting countries importing Venezuelan and potentially Russian oil, increasing pressure on China and India.
5. C.K. Hutchison–Blackrock Port Deal: At risk of being blocked by China, drawing scrutiny from U.S. officials.

Price Action

The U.S. dollar strengthened to CNH7.2840 against the offshore yuan—its highest since early March—and remains just below that level. Against the onshore yuan, it settled slightly above CNY7.27 after gapping higher. Last month’s highs remain within reach, and the overall trend reflects a strong dollar and a vulnerable yuan. Unless geopolitical tensions ease or the PBOC intervenes more forcefully, the pair could test recent highs above CNY7.29 and CNH7.30.

Key Points:

• Yuan weakens as USD/CNH reaches highest since early March.
• Stable PMI data had limited impact on sentiment.
• PBOC fixings suggest tight currency control, but pressure persists.
• U.S. threatens broader tariffs, targeting China’s oil trade and investment decisions.
• Risk of further yuan depreciation if political tensions escalate.

Europe

Overview

The euro is facing pressure, failing to hold above the $1.08 mark amid heavy option expiries and technical resistance. While markets increasingly believe the eurozone recovery is underway, the outlook remains uneven. Attention is now turning to inflation dynamics, with upcoming data expected to show a rebound in producer prices due to base effects. Despite improving sentiment, the euro remains capped by short-term option flows and upcoming economic releases.

Economic Drivers

While there’s growing confidence that the eurozone economy is stabilising, recovery remains inconsistent. The underlying inflation picture is becoming more complex, with base effects expected to drive producer prices higher in the coming months.

• Eurozone recovery is gaining traction, though progress varies across countries.
• Inflation is set to rise due to base effects from last year's weak producer price readings.
• Producer prices had been falling monthly from Nov 2023 to May 2024; these will drop out of annual comparisons.
• A modest monthly increase could push year-over-year PPI to 2.5%, up from 1.8% in January.

Data and Events

Several important eurozone data points are due that could influence inflation expectations and market sentiment. However, no surprises are expected in growth indicators.

1. Final March Services PMI (Tomorrow): Expected to confirm earlier estimates; reflects sector-level activity.
2. Final March Composite PMI (Tomorrow): Will reinforce the uneven but steady recovery narrative.
3. February Producer Price Index (Tomorrow): A small monthly rise (~0.3%) could lift annual PPI to 2.5%.

Price Action

The euro dipped below $1.0780 and has struggled to reclaim levels above $1.08. Despite option expiries around this key level—€820 million yesterday, €1.33 billion today, and another €5.6 billion between Thursday and Friday—the pair remains capped near $1.0810. This heavy concentration of expiring options is limiting upside potential in the short term and may continue to weigh on price action through the week.

Key Points:

• Euro remains below $1.08 amid technical resistance and large option expiries.
• Growing acceptance of eurozone recovery, though uneven across member states.
• Base effects expected to lift annual PPI, possibly up to 2.5%.
• Key eurozone data due tomorrow, but little change to growth outlook is expected.
• Option flows continue to dominate short-term price action.

Japan

Overview

The Japanese yen remains closely tied to movements in U.S. Treasury yields, particularly the 10-year note, which has dropped sharply since last week. The dollar experienced a technical reversal after reaching multi-week highs near JPY151.20 and has since fallen below JPY150. Market expectations for Bank of Japan rate hikes have also shifted significantly, with the likelihood of a second hike this year now seen as minimal. Growing uncertainty over U.S. trade policy is further complicating the outlook for both currencies.

Economic Drivers

The Japanese yen’s direction is increasingly influenced by developments in the U.S. bond market, with policy expectations for Japan taking a backseat. Broader concerns about U.S. trade policy are also shaping sentiment.

• The Bank of Japan is still expected to raise rates once this year, most likely in Q3.
• Market-implied probability of a second hike has dropped from 75% to under 10%.
• Governor Ueda has cited uncertainty around U.S. trade policy as a factor in policy outlook.
• U.S. yields remain a more dominant force in yen valuation than Japan’s own short-term rates.

Data and Events

While no immediate high-impact releases are steering the yen, shifts in rate expectations are now being reflected in swaps market pricing.

1. U.S. 10-Year Yield (Since Last Thursday): Dropped 25 basis points from ~4.40% to near 4.10%.
2. BOJ Rate Expectations: Swaps now see a ~75% chance of a hike by July and over 90% by the September 19 meeting.
3. Decline in Second BOJ Hike Expectations: Probability now under 10%, down from nearly 75% in early March.

Price Action

The dollar posted a bearish key reversal last Thursday after reaching JPY151.20, then fell to JPY148.70 on Monday. It continues to consolidate with a weaker tone, holding below JPY150. Correlation data shows that the yen's movement over the past 30 to 60 days has aligned more with U.S. 10-year yield changes (0.57 and 0.63) than with Japan’s two-year yield (-0.25 and -0.10), indicating that U.S. interest rate dynamics are driving the exchange rate.

Key Points:

• USD/JPY reversed from JPY151.20, now consolidating below JPY150.
• U.S. 10-year yield has fallen 25 bps, weakening the dollar against the yen.
• Market now expects only one BOJ rate hike this year, most likely in Q3.
• Second BOJ hike is seen as unlikely, with odds below 10%.
• Yen remains more closely tied to U.S. yields than domestic policy signals.

United Kingdom

Overview

The British pound remains confined within last Thursday’s range of approximately $1.2870 to $1.2990, trading quietly so far today. Despite this stability, technical indicators suggest increasing vulnerability to a downside break. Market momentum is fading, and the broader outlook is shadowed by soft economic conditions and political pressures. With little domestic news and the UK facing U.S. tariffs despite long-standing ties, attention is shifting toward how the government balances spending restraint with a slowing economy.

Economic Drivers

Sterling’s resilience masks deeper concerns. While political messaging has remained vague, the underlying economic and policy environment is weakening, and the UK may be forced into further spending cuts amid soft growth—even as the central bank begins easing.

• UK faces tariffs from the U.S., despite the "special relationship."
• Labour government may struggle to sustain spending as growth remains fragile.
• The Bank of England has entered a rate-cutting cycle, reflecting broader economic softness.
• Market expectations for additional fiscal restraint could weigh on sentiment.

Data and Events

There are no major UK data releases today. Political commentary and trade headlines continue to dominate the narrative.

1. UK Domestic News Flow (Today): Light, with no key scheduled releases.
2. US Tariffs on UK Imports: Seen as a political and economic setback.
3. Government Policy Commentary: Ongoing speculation around future fiscal tightening.

Price Action

Sterling continues to consolidate within a narrow range (~$1.2900–$1.2950) and remains below the previous high. The five-day moving average has dropped below the 20-day moving average for the first time in over two months, while momentum indicators are declining. A firm break below $1.2860 could trigger a sharper move lower, with the $1.2750–$1.2800 zone as the initial target.

Key Points:

• GBP/USD remains range-bound but shows signs of technical weakness.
• Downside break below $1.2860 could target $1.2750–$1.2800.
• UK faces U.S. tariffs despite close ties, adding pressure to outlook.
• Labour government may be forced to cut spending again within months.
• Bank of England rate cuts reflect underlying economic fragility.