Currency markets react sharply to tariff risks and AI disruption
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The currency market is navigating significant volatility as renewed U.S. tariff threats and disruptions from DeepSeek's AI developments shake investor confidence. The U.S. Dollar Index (DXY) rebounded to 107.89, up 0.49%, with the greenback strengthening against the euro, yen, and sterling.
Market Context
The euro (EUR/USD) declined 0.59%, trading at $1.0435, as tariff risks weigh on sentiment and the European Central Bank (ECB) prepares to cut interest rates later this week.
The yen (USD/JPY) weakened 0.76%, reaching ¥155.79, reversing Monday’s safe-haven gains that had pushed the yen to a six-week high of ¥153.72. The British pound (GBP/USD) dropped 0.47%, trading at $1.2447, amid broad dollar strength and heightened risk aversion. The DXY rose to 107.89, recovering from a one-month low of 107.68, as traders focused on the Federal Reserve’s two-day policy meeting starting Tuesday.
Key Drivers
Trump’s Tariff Threats: New comments from President Trump indicated potential 25% tariffs on imports of computer chips, pharmaceuticals, and steel, targeting production relocation to the U.S. Tariffs on Canada and Mexico may take effect on February 1, adding pressure to global trade relations.
DeepSeek’s AI Disruption: The release of DeepSeek’s AI model has unnerved markets, questioning the valuations of U.S. tech companies like Nvidia. This development contributed to Monday’s risk-off sentiment.
Central Bank Divergence: The Federal Reserve is expected to hold interest rates steady in the 4.25%-4.50% range, while the ECB is anticipated to cut its deposit facility rate by 25 basis points to 2.75%, widening the policy gap.
Technical Analysis
EUR/USD: Immediate support at $1.0400; resistance at $1.0480. A break below $1.0400 could push the pair towards $1.0350, while a recovery above $1.0480 might target $1.0520.
USD/JPY: Support holds at ¥155.50 with resistance near ¥156.00. A break above resistance could target ¥157.00, while failure to hold support risks a decline to ¥154.50.
DXY: Strong resistance near 108.20, with support around 107.50. Sustained movement above 108.20 would indicate continued dollar strength.
Events to Watch
The Federal Reserve’s meeting will conclude on Wednesday, with Chair Jerome Powell’s press conference providing key insights into inflation and future rate cut expectations.
The ECB will meet on Thursday, where a rate cut is widely expected, and President Christine Lagarde’s guidance on inflation will be crucial for euro direction.
Developments surrounding U.S. trade policies, particularly regarding tariffs on China, Mexico, and Canada, will remain a major influence on market sentiment.
Conclusion
The U.S. dollar stands to benefit from trade-related risk aversion and central bank policy divergence. However, the euro and yen are vulnerable to further losses if trade and economic uncertainties intensify. Key technical levels and central bank decisions will define currency movements in the near term.
Market Context
The euro (EUR/USD) declined 0.59%, trading at $1.0435, as tariff risks weigh on sentiment and the European Central Bank (ECB) prepares to cut interest rates later this week.
The yen (USD/JPY) weakened 0.76%, reaching ¥155.79, reversing Monday’s safe-haven gains that had pushed the yen to a six-week high of ¥153.72. The British pound (GBP/USD) dropped 0.47%, trading at $1.2447, amid broad dollar strength and heightened risk aversion. The DXY rose to 107.89, recovering from a one-month low of 107.68, as traders focused on the Federal Reserve’s two-day policy meeting starting Tuesday.
Key Drivers
Trump’s Tariff Threats: New comments from President Trump indicated potential 25% tariffs on imports of computer chips, pharmaceuticals, and steel, targeting production relocation to the U.S. Tariffs on Canada and Mexico may take effect on February 1, adding pressure to global trade relations.
DeepSeek’s AI Disruption: The release of DeepSeek’s AI model has unnerved markets, questioning the valuations of U.S. tech companies like Nvidia. This development contributed to Monday’s risk-off sentiment.
Central Bank Divergence: The Federal Reserve is expected to hold interest rates steady in the 4.25%-4.50% range, while the ECB is anticipated to cut its deposit facility rate by 25 basis points to 2.75%, widening the policy gap.
Technical Analysis
EUR/USD: Immediate support at $1.0400; resistance at $1.0480. A break below $1.0400 could push the pair towards $1.0350, while a recovery above $1.0480 might target $1.0520.
USD/JPY: Support holds at ¥155.50 with resistance near ¥156.00. A break above resistance could target ¥157.00, while failure to hold support risks a decline to ¥154.50.
DXY: Strong resistance near 108.20, with support around 107.50. Sustained movement above 108.20 would indicate continued dollar strength.
Events to Watch
The Federal Reserve’s meeting will conclude on Wednesday, with Chair Jerome Powell’s press conference providing key insights into inflation and future rate cut expectations.
The ECB will meet on Thursday, where a rate cut is widely expected, and President Christine Lagarde’s guidance on inflation will be crucial for euro direction.
Developments surrounding U.S. trade policies, particularly regarding tariffs on China, Mexico, and Canada, will remain a major influence on market sentiment.
Conclusion
The U.S. dollar stands to benefit from trade-related risk aversion and central bank policy divergence. However, the euro and yen are vulnerable to further losses if trade and economic uncertainties intensify. Key technical levels and central bank decisions will define currency movements in the near term.