Markets remain on edge as former US President Donald Trump reaffirmed that tariffs on Mexico and Canada are still under consideration, with the deadline for action set for next Monday.
However, investors have yet to fully price in the risks, though currency markets may respond more strongly as the week progresses.
“The dollar found firmer terrain at the start of the week and received some help in late European hours from President Trump’s claim that tariffs on Canada and Mexico are moving ahead,” ING strategists led by Francesco Pesole said in a note.
The proposed 25% duties were initially delayed in early February, pushing the decision to March 3. ING notes that Trump may be leveraging the threat “until the last minute to gain negotiating leverage, like in February.”
“Our working assumption remains that 25% tariffs on Mexico and Canada won’t materialize, and markets are also pricing in only a modest risk of that happening,” strategists added.
With the foreign exchange (FX) market potentially taking the threat more seriously along the week, strategists note that pairs USD/CAD and USD/MXN could face near-term upside risks.
Attention now turns to US economic data, with today's Conference Board consumer confidence report likely to influence sentiment. The index, which surged in November following the US election, has since weakened, and consensus expectations point to another decline from 104.1 to 102.5.
A drop toward 100 could trigger a stronger market reaction. Furthermore, the Richmond Fed indices will provide further insight into economic momentum after weaker-than-expected regional Fed activity readings from Chicago and Dallas.
ING suggests that the dollar's direction today will hinge on further tariff-related remarks from Trump or other US officials. “Barring that, and considering the market’s tendency to call the bluff on tariffs, we think the dollar can edge back lower today as consumer confidence risks disappointing,” Pesole and his team wrote.
A weaker report would reinforce concerns about softening consumption and could “favor some dovish repricing of Fed expectations.”
In the eurozone, markets are monitoring the ECB’s latest data on negotiated wage growth, but ING does not expect it to influence monetary policy. While wages rose 5.4% year-over-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 unlikely to shift its stance. ING sees limited upside for the euro, expecting EUR/USD to test 1.050 in the short term before trending lower toward 1.030.
