3 February 2025

The currency and stock markets have seen considerable volatility at the market open today following US President Donald Trump's weekend announcement of a string of import tariffs to Canada, Mexico, and China, with a clear statement that Europe will be next.

A 25% import tariff will be applied to goods imported from Canada and Mexico, and an additional 10% tariff on goods from China will begin on Tuesday. Trump has stated many reasons for the tariff introductions, including border security and a lack of policing on illegal drug imports, but the most significant is that of the US trade deficit. Ultimately, the US is considered to be importing too many goods into the country without enough being exported outwards.

When asked whether tariffs on the EU would follow, Trump stated, "It will definitely happen". As a result, the EU stock market dropped this morning, with European car manufacturers taking a significant hit. Germany is expected to be in a particularly challenging position as most of its trade with the US is in exports, and the tariffs will significantly increase specific sectors' production costs. As Germany is the largest economy in Europe, this could dramatically impact the region. The fallout has caused EUR/USD to fall to a 3-week low, whilst GBP/EUR has taken advantage of the single currency weakness and trades at a 4-week high.

The UK is hoping to steer clear of any tariffs, with Trump suggesting that a deal "can be worked out". This has helped sterling climb against most G10 currencies. The only exception is GBP/USD, which has lost up to 1.5 cents since last week and now sits at a 3-week low.

There is speculation as to whether Trump will pull these tariffs before tomorrow. It wouldn't be the first time this has happened. In January, Trump threatened Colombia with trade tariffs after the South American country rejected flights containing migrant deportees back to the US. He then pulled the tariffs the following day.

Market Data

Monday:

• EU inflation landed as expected at 2.5% this morning.
• The US Manufacturing PMI this afternoon is expected to increase from 49.3 to 49.8.

Wednesday:

• US ADP employment change is expected to move from the previous reading of 122k to the predicted 150k.
• US Services PMI also expected marginal improvement.

Thursday:

• The most important data release of the week is the UK's interest rate decision from the Bank of England, where there is a widely anticipated 25 basis point cut to 4.5%. Bloomberg's probability of a cut is currently sitting at 98%.

Friday:

• Canadian employment numbers are expected to drop by 50% to 48.5k
• US hourly earnings are expected to fall.
• US nonfarm payroll is expected to drop from 256k to 170k.

Views expressed in this commentary are those of the author, and may differ from your appointed Moneycorp representative. This commentary does not constitute financial advice. All rates are sourced from Bloomberg and forecasts are taken from Forex Factory.