The dollar faces consolidation after Monday's volatility sparked by a report (quickly refuted) on more selective US tariff policies. While investors remain cautious ahead of Trump's inauguration, the possibility of softer tariffs and large-scale FX intervention from Japanese authorities are influencing market dynamics. Chinese central bank actions supporting the renminbi further add to the equation.
is staying a little offered despite Donald Trump rebutting a report that his tariff policies could be more selective. We're also getting closer to some large-scale FX intervention from Japanese authorities. For today, look out for some firm US activity data and another round of sticky European inflation.
A second point worth mentioning is that risk assets are slightly better bid on the prospects of less aggressive US tariff policy plus the news yesterday that the Fed's Michael Barr is stepping down in his role as the Fed's financial supervision tsar. He had been battling Wall Street for tighter capital controls, but it seems he did not want a looming fight with the new administration to distract from the Fed's work. The US KBW regional banks index briefly rallied 2% on the news.
Short EUR/USD has probably been one of the highest conviction FX trades in late 2024. Notably, EUR/USD could not make it back to the 1.0335 starting point when the tariff report first came out. The FX options market suggests investors may be the most worried about an upside correction in EUR/USD since September. We read this from the one-week risk reversal – the price for a EUR/USD call over an equivalent EUR/USD put – which at 0.15% vols is now the highest since late September.
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