Trump’s announcement of 25% tariffs on steel and aluminum imports, with no exemptions or exceptions, sparked concerns about a potential trade war on Monday. However, with the activation set for early March, many in the market began to view the move as a negotiation tactic rather than a definitive step toward escalating tensions. This shift in perspective helped ease some of the initial fears, reversing the earlier cautious optimism.
Apart from the tariffs, US President Trump also warned Hamas to return all the Israeli hostages by mid-day Saturday or witness a cancellation of the Hamas-Israel ceasefire and “let hell break out.”
Meanwhile, the latest Reuters polls show that most economists expect the Fed rate cuts to be delayed due to growing concerns about inflation. However, the New York Federal Reserve's more moderate one-year inflation expectations have offset the University of Michigan's survey, which suggested higher inflation risks. Despite this, the one-year inflation survey had little impact on the market, as the five-year inflation expectations rose to 3%, up from 2.7% the previous month.
Amid these plays, the US Dollar Index (DXY) marked a three-day winning streak on Monday, mildly bid by the press time of early Tuesday, as market players await the bi-annual testimony from Fed Chairman Jerome Powell.
The US Dollar’s rise puts pressure on the EURUSD pair despite European Central Bank (ECB) President Christine Lagarde and Vice President Luis de Guindos emphasizing a meeting-by-meeting approach to rate cuts and stressing the need to avoid a trade war. In doing so, the Euro also overlooks a rise in the Eurozone's February Sentix investor confidence, which improved to -12.7 from the expected -16.3 and the prior -17.7.
Meanwhile, the USDJPY pair lacks momentum, influenced by Japan's National Foundation Day holiday. That said, the Yen is unable to extend its previous rebound from a two-month low, amid the Bank of Japan's hawkish stance and the JPY's typical safe-haven appeal.
On Tuesday, Bank of England (BoE) Monetary Policy Committee member Catherine Mann told the Financial Times (FT) that British firms are struggling to increase prices as consumers trim their spending. Her comments gained credence from Tuesday’s UK BRC Like-for-Like Retail Sales as the growth for January slowed to 2.5% YoY versus 3.1% prior and 0.2% expected.
Given the dovish BoE bias and downbeat British data, coupled with comparatively better USD status, the GBPUSD dropped to the lowest in more than a week early Tuesday as traders await Fed Chair Powell’s testimony and a speech from BoE Governor Andrew Bailey.
The Australian (AUD), New Zealand (NZD), and Canadian (CAD) Dollars remain under pressure, but the bears paused early Tuesday as traders await key updates, including more news on tariffs and China's stimulus. There are mixed reactions to Trump’s tariff announcements and China's economic measures. Meanwhile, Australia's sentiment data also flashed mixed signals, limiting AUDUSD movement at a multi-day low. NZDUSD is struggling to respond to comments from New Zealand’s Finance Minister about the country’s strong relationship with the US. In contrast, USDCAD is recovering, driven by geopolitical and trade tensions between the US and Canada, despite stronger crude oil prices, which is a key export for Canada.
Amid global trade war fears, rising geopolitical tensions, and uncertainty over central banks' next moves, gold prices surged to a record high of $2,945 before retreating to around $2,925. Despite a stronger US Dollar, gold bulls remain cautious ahead of Fed Chair Powell’s testimony.
Meanwhile, Crude Oil has risen for the third consecutive day, fueled by concerns over the renewed Israel-Hamas conflict and failed peace talks between Ukraine and Russia. Fears of a potential supply crunch are also supporting energy prices, though these concerns have been somewhat tempered by OPEC+'s willingness to increase output after Q1 2025 and Trump’s push for more oil drilling.
Even if the tariff woes join hawkish Fed bias to test buyers of Bitcoin (BTCUSD) and Ethereum (ETHUSD), the top-tier cryptocurrencies pick up bids to extend the week-start rebound amid fears of short-squeeze after CME’s heavy selling. Also favoring Bitcoin and Ethereum could be the Strategy’s BTC buying spree and Trump-inspired industry optimism.
In addition to Fed Chair Powell’s bi-annual testimony and a speech from BoE Governor Bailey, which are key events of the day, European Commission President Ursula von der Leyen’s meeting with US VP Vance, along with public appearances from mid-tier policymakers in the UK, Europe, and the US, will also be important to monitor for potential market shifts. Developments surrounding Trump’s tariffs, border plans, and ongoing geopolitical tensions in the Middle East and between Russia and Ukraine will also be crucial in determining the market's direction.
Given the hawkish Fed outlook, expectations for further rate cuts from the BoE, and the USD's strength amid tariff and geopolitical concerns, GBPUSD is likely to remain under pressure. This will hold even if Powell refrains from backing rate hikes or pauses rate cuts, or if BoE’s Bailey adopts an optimistic tone.
Meanwhile, sellers of EURUSD, AUDUSD, and NZDUSD may remain in control, while USDCAD and USDJPY could edge higher. Gold, however, appears to lack upside momentum lately. Crude oil could continue its recovery if today’s API inventories fall and Middle East tensions rise. Crypto buyers may find it challenging to maintain control, and equities could see a pullback.
May the trading luck be with you!
