January 21, 2025 at 03:57PM
MUFG notes that Trump’s inauguration speech, with a heavier focus on immigration than trade, has reduced immediate risks for EUR/USD to drop below parity in Q1. However, trade-related uncertainties persist, particularly around potential tariff actions later this year.
Key Points:
Trade Policy Focus and Market Expectations:
Trump’s speech emphasized immigration over immediate trade measures, dampening market fears of aggressive early tariff actions.
Trade reviews have been scheduled for key agreements (e.g., Phase 1 deal with China, USMCA, and export controls), with findings due by April 1.
European Exposure to Trade Risks:
Europe faces potential tariff threats, particularly linked to natural gas purchases from the US, though specifics remain vague.
The lack of immediate action on Europe and China lowers the urgency of trade-related EUR downside risks in Q1.
FX Market Reaction and USD Positioning:
The USD rally suggests markets were pricing in more aggressive trade moves.
With ambiguity around the timing and nature of tariff announcements, USD selling is likely capped, but immediate EUR/USD downside risks have diminished.
Conclusion:
While the long-term threat of tariffs and trade tensions remains, the reduced immediacy of aggressive US actions has lessened the risk of EUR/USD breaking below parity this quarter. Markets will likely shift their focus to the April 1 review date, where the trade narrative could reignite.
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This article was written by Adam Button at www.forexlive.com.