The financial markets are showing signs of stabilization at the start of European trading on Monday (February 3, 2025), following a morning of significant upheaval. As highlighted, Trump signed an executive order over the weekend to implement a 25% increase on import tariffs from Canada and Mexico, and a 10% hike from China, effective February 4th.
Shortly after, Canadian Prime Minister Justin Trudeau retaliated by raising tariffs on imports from the United States by 25%. Mexico and China are also expected to respond in kind.
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This escalation raises concerns about a larger trade war, which is anticipated to be a driving sentiment for the markets during the evening’s trading session.
GOLD
As anticipated in the previous Macro Overview, Gold (XAUUSD) experienced a rebound at the outset of European trading after dropping to US$ 2,772.15 per troy ounce earlier.
The strong US dollar triggered profit-taking in Gold, causing a decline of more than US$ 25 (250 pips) after it had reached a record high the previous Friday.
The risk of an impending trade war is boosting Gold’s appeal as a safe haven, facilitating its recovery. This sentiment is expected to continue influencing Gold’s price movements in tonight’s trading, along with the release of the US manufacturing Purchasing Managers’ Index (PMI) data from ISM at 10:00 PM WIB.
Forecasts from Trading Central indicate that the PMI for January is expected to be 49.8, up from 49.3 in the previous month. This data could provoke further profit-taking in Gold if released above 50.
OIL
Oil prices (CLS10) are displaying volatility but have managed to retain some gains following a surge earlier today. The spike in oil prices is attributed to Trump’s decision to impose a 10% import tariff on Canadian energy sector goods.
The increase in tariffs for this sector is lower compared to other goods, as Trump aims to avoid escalating domestic fuel prices which could drive inflation. Nonetheless, this tariff increase has still contributed a positive sentiment towards oil pricing.
Further positive sentiment for oil could emerge if tonight’s PMI for manufacturing is reported above 50, indicating expansion. A booming manufacturing sector often suggests heightened oil demand.
EURUSD
The EURUSD pair reduced its earlier losses after plummeting by 1,490 points (nearly 150 pips) in the morning to 1.02104. Data released from the Eurozone this afternoon indicated rising inflation, though still in line with forecasts, which did not significantly aid the EURUSD’s position.
This currency pair is under pressure due to the possibility of increased import tariffs affecting the European Union, which Trump has previously indicated. The EU has also responded firmly, asserting that it will raise tariffs on US imports as well. This means a trade war could occur between the US and the EU.
Negative sentiment surrounding this scenario could intensify if the US PMI data released tonight is above 50.
GBPUSD
Similar to the EURUSD, this currency pair also managed to recover some ground after a drop of 1,416 points (141.6 pips) early this morning, reaching 1.22491. The risk of a second trade war has heightened the demand for the US dollar as a safe haven, further pressuring GBPUSD.
Additionally, there is potential for the UK economy to deteriorate if a trade war unfolds. This negative sentiment is expected to loom and could worsen if the US manufacturing PMI report comes in higher than 50.
USDJPY
USDJPY continues to experience high volatility at the beginning of European trading, oscillating between 154.779 and 155.881. This volatility arises because both the US dollar and yen are regarded as safe haven assets.
However, the US dollar stands to gain an edge, particularly if the increase in import tariffs leads to accelerated inflation in the US, prompting the Fed to adopt a more cautious approach towards interest rate cuts. A higher-than-forecast PMI reading could add positive sentiment to USDJPY.
Nasdaq
The Nasdaq has rebounded at the start of European trading after a significant drop of over 600 index points earlier today. The index touched a daily high of 21,248, which still remains over 320 index points below Friday’s closing figure.
The risks of a second trade war have triggered sell-offs in stock indices, including the Nasdaq. Canada has retaliated with a 25% increase in tariffs on US goods, with expectations that Mexico and China may follow suit. These developments are likely to continue overshadowing Nasdaq’s movements in the evening’s trading.
