- The dollar was on the back foot at the start of the week, allowing its peers to gain.
- Data revealed a bigger-than-expected expansion in Canada’s economy.
- US core inflation increased in line with expectations.
Currency futures gained on Monday as the dollar eased amid renewed trade war fears. Trump threatened more tariffs last week, which weighed on investor confidence in the US economy. Meanwhile, market participants are looking forward to crucial US employment figures for clues on future Fed moves.
The dollar was on the back foot at the start of the week, allowing its peers to gain. The decline followed comments last week that revealed Trump was still ready to implement more tariffs. The US president threatened to increase tariffs on aluminium and steel to 50%. The news initially boosted the dollar as it meant increased demand for local production and likely higher imported inflation. However, it could also mean trade wars with some of the US’s trading partners, including Canada and the Eurozone.
Although Trump has signed deals with some partners like the UK and China, tariffs are still pending for many of its other partners. Moreover, time is ticking. Last week, a US trade court tried to block some of Trump’s tariffs. However, they were temporarily reinstated on Thursday.
With these tariffs remaining active, the risk of a global trade war will remain. At the same time, investor confidence in the US will likely stay weak.
However, there is hope for the euro as talks between the US and the Eurozone continue. A trade deal would be good for both economies and would reduce the likelihood of a trade war.
At the same time, easing Eurozone inflation has increased expectations for an ECB rate cut. The move might weaken the euro if policymakers forecast more to come.
Meanwhile, the Canadian dollar strengthened after data revealed a bigger-than-expected expansion in Canada’s economy in the first quarter. The report increased expectations for another Bank of Canada pause this week.
Elsewhere, data on Friday revealed that US core inflation increased in line with expectations. Meanwhile, the annual PCE figure eased from 2.3% to 2.1%. However, the Fed will likely maintain its wait-and-see approach as Trump remains unpredictable. Additionally, policymakers are waiting to see the full impact of his tariffs before making the next move.
The nonfarm payrolls report is due on Friday. This will show the state of the labor market in May. Moreover, it might reveal whether tariffs had a significant negative impact on the economy.
