- Currency futures strengthened last week as the impact of Trump’s tariff threats faded.
- Data on Friday revealed that US service sector business activity slowed in January.
- Investors are now awaiting policy decisions from the Fed, BoC, and ECB.
Currency futures rallied on Friday as the dollar eased due to downbeat US business activity data. At the same time, data from other countries like the Eurozone and the UK revealed a rebound in economic activity. However, by Monday, the greenback rebounded as traders geared up for the Fed policy meeting.
Currency futures strengthened last week as the impact of Trump’s tariff threats faded. Initially, investors had feared that aggressive import tariffs in the US would significantly hurt its trading partners. Notably, the US president had promised punitive tariffs on the Eurozone, China, and Canada. At the same time, he had proposed a universal tariff on all imports.
The Eurozone economy is already struggling, putting pressure on the European Central Bank to cut interest rates. Tariffs would further weaken the economy, leading to a more aggressive ECB easing cycle and a weaker currency.
Similarly, Canada’s economy has slowed significantly due to the impact of high interest rates. As a result, the Bank of Canada has maintained an aggressive pace at lowering interest rates to spur economic growth. A 25% tariff on Canadian goods would have plunged the loonie. Therefore, when Trump failed to give a way forward last week, investors were relieved, and currency futures rose.
US business activity (Source: S&P Global)
At the same time, data on Friday revealed that US service sector business activity slowed in January. The flash PMI reading eased from 56.8 to 52.8. Although the sector remained in expansion, there was a significant drop in activity. As a result, the US dollar fell, allowing currency futures to climb.
Meanwhile, in the Eurozone, business activity in both the manufacturing and services sectors improved, with France and Germany leading. This rebound gave the euro more life. At the same time, UK business activity improved, boosting the pound.
Elsewhere, the yen gained after the Bank of Japan hiked interest rates by 25-bps. Before the meeting, the central bank was under a lot of pressure to hike due to a stronger dollar and Trump’s policies. The move gave the yen some relief. Investors are now awaiting policy decisions from the Fed, BoC, and ECB. While economists expect the Fed to pause, they forecast rate hikes in Canada and the Eurozone that will likely weigh on their currencies.
