On Friday (January 31) during the European trading session,  the US dollar index remained flat, hitting a low of 107.9699 before rebounding to 108.2519/2843, an increase of 0.12%.

Due to Trump's reaffirmation that he will impose a 25% tariff on both countries before tomorrow, the Canadian dollar and Mexican peso plummeted yesterday. Whether he fulfills this threat will determine the price trend of the entire foreign exchange market. If we don't see any news about Canada and Mexico by the end of today, the risk could be a strengthening of the US dollar.

Will Trump Strike Canada and Mexico?

This weekend will be the first test of US President Trump's seriousness about his protectionist threats, as Canada and Mexico face a deadline for 25% tariffs tomorrow. When Trump reiterated his protectionist plans for the US Mexico Canada trade agreement partners yesterday, neither the Canadian dollar nor the Mexican peso fully absorbed tariff risks, leading to a sell-off of the Canadian dollar and Mexican peso and a general rise in the US dollar. The market continues to approach these threats with caution, and if we really see official tariffs imposed tomorrow, both the Canadian and Australian dollars will face major downside risks.

Earlier this week, Howard Lutnick, the Commerce Secretary nominated by Trump, stated that tariffs can be avoided if both countries meet border requirements. A benign scenario would be for Trump to reach a last-minute agreement with US neighbors to lift (or at least suspend) tariff threats.

The new government's handling of the US Canada Mexico situation may be used by the market as a benchmark for Trump's future trade policies, and therefore should have a significant impact on global foreign exchange. If Trump does not fulfill his threat by tomorrow, we should see the US dollar depreciate not only against the Canadian and New Zealand dollars, but also against other currencies with tariff risks such as the Australian dollar, New Zealand dollar, and euro. Investors' intuition may be that Trump will only use tariffs primarily as a threat to negotiations, but ultimately will not hit his main partners.

In terms of data, the core personal consumption expenditure in the United States will be released today, and it is expected to accelerate by 0.2% in December, although the risk leans towards stronger data. Yesterday, the GDP growth rate in the fourth quarter of the United States was lower than expected, at 2.3%. Although this is a significant slowdown compared to the 3.1% growth rate in the third quarter, consumption is still very strong. By the way, in the week ending January 25th, the number of people applying for unemployment benefits unexpectedly decreased, indicating that the impact of the California wildfire on employment is limited, at least for now.

Anyway, it is expected that the US dollar will be mainly driven by tariff stories. If we have no news about Canada and Mexico by the end of today, the risk may be a strengthening of the US dollar, as the market is more likely to announce tariffs tomorrow.

Euro: The leaked information after the meeting is not very important now

The European Central Bank cut interest rates by 25 basis points yesterday, and the relevant information is fully in line with expectations. The Governing Council of the European Central Bank has retained its practice of holding meetings one by one and relying on data, but has also reiterated its dovish tendencies against the backdrop of optimistic anti inflation expectations and bleak growth prospects. Unlike the Bank of Canada, which tightly linked future interest rate cuts to US trade policy on Wednesday, the European Central Bank seems to be moving towards lower interest rates regardless of Trump's tariff plans.

The most interesting development may be the news revealed to the media that the Governing Council of the European Central Bank will abandon the "restrictive" mention of interest rates when it cuts interest rates again in March. From the current situation, this can be interpreted as a moderate hawkish signal, but it needs to be balanced against a new assessment of neutral interest rates. On February 7th, the European Central Bank will release a report that will provide some hints. At present, the communication between the European Central Bank during and outside the meeting is too mild to prove that reconsidering dovish expectations is reasonable.

However, the factor that may affect the pricing of the European Central Bank is data. Today, France and Germany released their CPI preview values for January, and the market generally believes that France's CPI will accelerate again to 1.5%, while Germany's CPI will remain flat at 2.6%. The details about the core components should attract more interest, but considering that Eurozone President Lagarde reiterated her tolerance for mild inflation fluctuations in the first half of this year, we may need to see a surprise surge in prices to push the euro higher significantly.

Anyway, the EUR/USD will continue to follow the fluctuations of the US dollar driven by tariffs. If Trump imposes tariffs on Canada and Mexico before tomorrow, we believe that against the backdrop of a stronger US dollar, the euro could easily fall below 1.030 against the dollar, and the euro may face greater tariff risks.