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Week Ahead: Trade Tensions, Dollar Rally, and Employment Trends Drive Markets

Major market turbulence follows Trump's new tariff announcement, with 25% duties on Canadian and Mexican exports and 10% on Chinese goods. The US dollar surges 1.2% as global currencies plunge. Markets brace for potential trade war impacts, with economists warning of supply chain disruptions and recession risks. Key events this week include US labor data and Trump's negotiations with Canada and Mexico.



Key Events and Data to Watch This Week


Monday

  • 08:30 - Australia Retail Sales (Dec)

  • 09:45 - China Caixin Manufacturing PMI (Jan)

  • 18:00 - Eurozone H. Index of Consumer Prices (Jan) Prelim

  • 23:00 - US ISM Manufacturing PMI (Jan)


Tuesday

  • 23:00 - US Factory Orders (Dec)

  • 23:00 - US JOLTS Job Openings (Dec)


Wednesday

  • 07:30 - Japan Labor Cash Earnings (Dec)

  • 08:00 - Australia TD-MI Inflation Gauge (Jan)

  • 09:45 - China Caixin Services PMI (Jan)

  • 17:00 - Eurozone HCOB Composite PMI (Jan)

  • 18:00 - Eurozone Producer Price Index (Dec)

  • 21:15 - US ADP Employment Change (Jan)

  • 23:00 - US ISM Services PMI (Jan)


Thursday

  • 08:30 - Australia Trade Balance (Dec)

  • 15:00 - Germany Factory Orders (Dec)

  • 18:00 - Eurozone Retail Sales (Dec)

  • 20:00 - UK BoE Interest Rate Decision

  • 20:30 - US Challenger Job Cuts (Jan)

  • 21:30 - US Unit Labor Costs (Q4) Prelim

  • 21:30 - US Nonfarm Productivity (Q4) Prelim


Friday

  • 15:00 - Germany Trade Balance (Dec)

  • 21:30 - Canada Unemployment Rate (Jan)

  • 21:30 - Canada Net Change in Employment (Jan)

  • 21:30 - US Average Hourly Earnings (Jan)

  • 21:30 - US Nonfarm Payrolls (Jan)

  • 21:30 - US Unemployment Rate (Jan)


Trump's Trade War Kicks Off: Global Economic Risks Mount


Markets kicked off the new week with sharp moves following U.S. President Donald Trump's decision to follow through on his tariff threats. The U.S. dollar surged about 1.2% against a basket of major currencies at the start of the week, while currencies of countries directly affected by the tariffs plunged to their lowest levels in decades against the dollar.


On Saturday, Trump implemented his threatened tariffs, imposing a 25% duty on exports from Canada and Mexico and a 10% duty on Chinese goods. Energy products from Canada will face a 10% tariff.


According to officials familiar with the matter, the decision includes a clause stating that these rates could increase if the affected countries retaliate with tariffs on U.S. goods. The tariffs are set to take effect on Tuesday, and President Trump plans to hold talks with Canada and Mexico on Monday before they are implemented.


Trump's policy move was widely interpreted as the first step toward a potential trade war, fueling concerns about the global economic outlook. While the U.S. dollar rallied, U.S. equities declined as investors anticipated corporate earnings would suffer due to the tariffs.


Most currencies depreciated against the dollar, with the Mexican peso losing around 3% and the Canadian dollar dropping to its lowest level since 2003. The offshore yuan also weakened by approximately 0.5%.


Shortly after the announcement, Canadian Prime Minister Justin Trudeau responded by stating that Canada would impose a 25% retaliatory tariff on U.S. goods. Meanwhile, Mexico and China took a more cautious approach.


Mexican President Claudia Sheinbaum vowed to respond but also called for cooperation. On Sunday, China's Ministry of Commerce announced that it would initiate legal action at the World Trade Organization but refrained from directly threatening retaliation.


The European Union was not among the immediate targets of Trump's trade measures. However, Trump complained about unfair treatment of U.S. exports, such as American-made cars sold in Europe, and warned that tariffs on EU goods were "definitely coming." In response, EU officials declared that they would not hesitate to retaliate if Trump imposed new duties.


Economists have warned that the tariffs could disrupt supply chains, drive up consumer prices, and slow global trade flows, posing significant challenges for many economies. They also cautioned that the Mexican and Canadian economies could slip into recession as a result.


Although the tariff rate imposed on China is lower than Trump had previously suggested during his campaign, it could still create additional difficulties for an already struggling economy. Furthermore, if the eurozone, which showed no economic growth last quarter, faces new tariffs, its economic slowdown could deepen.


Expectations are rising that if countries targeted by Trump's tariff threats retaliate, trade tensions could escalate, putting additional pressure on other currencies and strengthening the U.S. dollar in the short term. The dollar's rally is being driven by expectations that tariffs will fuel inflationary pressures in the U.S., potentially forcing the Federal Reserve to keep interest rates higher for longer.


Additionally, traders are betting that the tariffs will harm other economies more than they will hurt the U.S. If the eurozone is hit with tariffs, some analysts predict the dollar could reach parity with the euro by the end of the first quarter.


On the other hand, high tariffs could drive up U.S. inflation while also negatively impacting economic growth. This has led some economists to speculate that the U.S. economy could face the risk of stagflation. Bloomberg Economics estimates that Trump's tariff move could cause a significant supply shock to the domestic economy.


According to their projections, the tariffs could shave 1.2% off U.S. GDP growth and push core inflation up by 0.7%.


On Friday, the December reading of the Fed's preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index, rose slightly in line with expectations. Core PCE, which excludes volatile food and energy costs, increased 0.2% from the previous month and was up 2.8% year-over-year.


Meanwhile, real disposable income growth was weak at 0.4%. Personal spending rose by 0.7%, exceeding expectations, though this likely reflected frontloaded demand for durable goods driven by tariff concerns.


Slower growth in real disposable income could weigh on consumer demand, raising expectations that demand-driven inflation may ease in the coming months. Following the inflation report, swap markets priced in a roughly 90% probability of two quarter-point Fed rate cuts this year. However, after the tariff news, concerns over inflation caused that probability to drop to around 70%.


This week, traders will closely watch Trump's negotiations with Mexico and Canada to see whether the tariffs will be enforced. Additionally, they will await Friday's U.S. labor market data, which could shape expectations for the Fed's rate path.



Safe-Haven Dilemma: Strong Dollar Weighs on Gold Demand


Gold prices came under pressure after President Trump's tariff announcement triggered the U.S. dollar's biggest surge in nearly three months. After starting the new week with a nearly 1% decline, gold managed to recover some of its losses, climbing back above $2,785 per ounce.


Higher tariffs are expected to fuel inflationary pressures and limit the Federal Reserve's room for rate cuts. Higher interest rates are typically negative for non-yielding precious metals, while a stronger dollar makes gold more expensive for foreign buyers, further dampening demand.


In the short term, tariff-related dynamics could weigh on safe-haven demand for gold. While tariffs add uncertainty to the global economic outlook—normally supporting safe-haven flows—the current strength of the dollar is diverting those flows away from gold.


On the other hand, countries targeted by U.S. tariffs could retaliate with their own tariffs on American goods. Additionally, tariffs could push U.S. inflation higher while slowing economic growth, ultimately weakening America's economic strength.


As a result, while tariffs may initially act as a tailwind for the U.S. dollar, their potential medium- to long-term impact on the economy could weigh on the currency's strength. In such a scenario, gold demand could see a resurgence.


Another key factor for gold's outlook is market expectations regarding Fed rate cuts. Traders see the possibility of the Fed pausing rate cuts for an extended period due to tariff-driven inflation concerns. However, the state of the labor market could shift this outlook. For further clues, traders will be closely watching Friday's employment report.


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