Markets remain on edge after US President Donald Trump reiterated that tariffs on Mexico and Canada are still under consideration, with a decision deadline set for next Monday.
However, investors have yet to fully factor in the risk, although currency markets are expected to react more sharply by the end of the week.
US Dollar Rises Amid Tariff Tensions
“The dollar found a firmer footing at the start of the week and received additional support at the end of the European session after Trump claimed that tariffs on Canada and Mexico would go ahead,” ING’s strategy team led by Francesco Pesole said in a note.
The previously proposed 25% duty was delayed in early February, pushing the decision back to March 3. ING believes Trump may use this threat “until the last minute to gain leverage in negotiations, as he did in February.”
“Our baseline assumption remains that the 25% tariffs on Mexico and Canada will not materialize, and the market also only considers moderate risks to that possibility,” the analysts added.
With the forex market potentially reacting more seriously to the tariff threat throughout the week, ING analysts warned that the USD/CAD and USD/MXN currency pairs could face upside risks in the near term.
Attention is now on US economic data, with the Conference Board’s consumer confidence report due later today expected to weigh on market sentiment. The index surged in November after the US election but has since weakened. The consensus forecast is for a decline from 104.1 to 102.5.
A drop towards 100 could trigger a larger market reaction. In addition, the Richmond Fed index will provide further insight into economic momentum after weak regional Fed activity readings from Chicago and Dallas.
According to ING, the direction of the US dollar today will depend on any further comments on tariffs from Trump or other US officials. “In the absence of any new statements, and given the market’s tendency to be less credulous about the tariff threat, we expect the US dollar to weaken again today if the consumer confidence report disappoints,” Pesole and his team wrote.
A weaker report would reinforce concerns about a slowdown in consumer spending and could “drive a more dovish readjustment of market expectations for Fed policy.”
In the eurozone, markets are now looking at the latest European Central Bank (ECB) data on negotiated wage growth, but ING does not expect it to have a major impact on monetary policy. While wages rose 5.4% year-on-year in the third quarter, the increase was largely driven by one-off payments.
The ECB is more focused on broader wage trends, and with recent indicators pointing to a slowdown, the central bank is expected to maintain its current stance. ING sees limited upside potential for the euro, with EUR/USD expected to test 1.050 in the near term before falling further towards 1.030.
