The United States dollar index started at multi-week highs, buoyed by escalating trade tensions following President Donald Trump's announcement of wide-ranging tariffs on major trading partners, including Canada, the European Union, Mexico, Japan, and South Korea.
The market’s growing risk aversion fuelled strong safe-haven demand for the Greenback, while expectations for near-term rate cuts by the Federal Reserve continued to fade.
President Trump’s aggressive tariff campaign intensified over the past week, as he posted open letters on Truth Social threatening trade penalties on more than 40 nations.
Among the most significant measures, Trump announced a 35% tariff on Canadian goods effective 1 August, citing trade imbalances and fentanyl smuggling.
In his message to Canadian Prime Minister Mark Carney, Trump warned that retaliatory duties would be matched by further levies. He also clarified that transshipped goods would be taxed unless fully manufactured in the United States.
Further escalation came over the weekend, as Trump unveiled new 30% tariffs on EU and Mexican imports, also effective from 1 August.
He added that any retaliation would be met with proportional increases, and warned other trading partners of blanket tariffs ranging between 15% and 20%.
The sweeping nature of these threats has sparked concern among market participants amid a higher potential that global supply chains could be disrupted, raising import costs and stoking inflation.
Euro Struggles Amid Tariff Turmoil
The Euro started the week at 1.1670, a multi-week low, amid soured sentiment as tariff-related headlines dominated the markets.
Despite a marginal improvement in Eurozone investor sentiment, economic data from the bloc remained broadly negative.
Retail sales in the Eurozone fell 0.7% in May, and Germany’s harmonised index of consumer prices (HICP) remained subdued at 2% year-on-year.
As investors await U.S. inflation data and the Fed’s next move, the EUR/USD pair remains under pressure.
Trump’s renewed attacks on Fed Chairman Jerome Powell - calling him “Too Late” and a “whining baby” - have also added to market instability.
National Economic Council Director Kevin Hassett stated that the White House is examining whether it has the legal authority to remove Federal Reserve Chair Jerome Powell.
Although President Donald Trump has previously said he does not wish to fire Powell, Hassett’s remarks indicate that senior administration officials are still weighing the option.
The Trump administration is reportedly focusing on the Federal Reserve’s US$2.5 billion renovation project as a potential justification for Powell’s dismissal.
Aussie Holds Near Resistance
The Australian dollar started the week below recent six-month highs as the AUD/USD currency pair looks to test resistance at 0.6600.
The pair struggled to break higher despite a hawkish tilt from the Reserve Bank of Australia (RBA), which held rates steady at 3.85% last week in a surprise move.
Australia’s relatively low exposure to Trump’s trade tariffs - owing to its modest trade deficit with the U.S. - has helped support the Aussie.
However, with global risk appetite deteriorating and the Fed's rate path still unclear, the Australian dollar remains vulnerable.
Sterling Sinks as UK Data Disappoints
The Pound Sterling weakened to 1.3526 against the U.S. Dollar, dragged down by Trump’s tariff blitz and disappointing UK economic data.
A 0.1% contraction in monthly gross domestic product for May and sharp declines in industrial and manufacturing output added to the bearish tone.
The GBP/USD pair had started the week on the back foot following Trump's Monday announcement of 25% tariffs on Japanese and Korean imports, which was quickly followed by letters to 12 other nations warning of 25% - 40% levies.
The pair struggled amid lingering uncertainty around Brexit-era trade relations and the UK's ability to negotiate new bilateral agreements in the current protectionist climate.
Traders are also eyeing this week's UK inflation data and U.S. economic releases, which could further shape market expectations.
Yen Weakens on Yield Gap and Trade Risks
The Japanese Yen started the week lower against the U.S. dollar, with the USD/JPY pair touching fresh three-week highs of 147.53.
The widening yield differential between Japan and the U.S. remains a key driver of yen weakness, as the Fed holds firm on high rates while the Bank of Japan maintains a dovish stance with a benchmark rate at just 0.50%.
Additionally, Trump’s 25% tariff threat on all Japanese imports, combined with 50% duties on Japanese steel, aluminium, and potentially copper, added to the pressure on the Yen.
Tokyo is reportedly scrambling to negotiate a trade exemption before the 1 August deadline.
Economic Calendar Week Ahead
On Monday, attention will turn to Asia, where Japan will release its latest machinery orders, capacity utilisation figures, and industrial production data. Singapore will publish its second-quarter gross domestic product growth, while China will unveil its trade balance, including imports and exports, alongside updates on M2 money supply, new yuan loans, and outstanding loan growth figures.
On Tuesday, the United Kingdom will release the British Retail Consortium’s retail sales monitor, while Australia will provide the latest Westpac-Melbourne Institute consumer confidence survey.
China will release a suite of data, including the house price index, fixed asset investment year-to-date, GDP growth rate, industrial production, retail sales, and the unemployment rate.
From Europe, industrial production and the ZEW economic sentiment index will be published. Canada will report on housing starts and headline consumer price inflation. In the United States, markets will watch for June’s consumer price index inflation data and the New York Empire State manufacturing index.
Moving into Wednesday, South Korea will release import and export price indexes, as well as unemployment figures. The UK will publish its consumer price index and inflation data along with the retail price index.
The euro area will report its latest balance of trade, while the US will issue producer price inflation figures, capacity utilisation data, and both industrial and manufacturing production results.
On Thursday, the U.S. Federal Reserve will release its Beige Book, providing insights into regional economic conditions. Japan will report its trade balance, including imports and exports.
Australia will deliver updates on employment change and the unemployment rate, while the UK will also release its labour market data, including employment change, unemployment, and average earnings.
The eurozone will release updated consumer price index inflation numbers. The U.S. session will be busy with data on import and export prices, initial jobless claims, the Philadelphia Fed manufacturing index, business conditions, retail sales, business inventories, and the NAHB housing market index.
On Friday, Japan will report its national consumer price index inflation rate, while the eurozone will publish its current account data. In the United States, investors will watch for figures on building permits, housing starts, and foreign bond investment activity.
Looking to Saturday, the University of Michigan will release its preliminary consumer sentiment index, which will provide further insights into U.S. consumer confidence and inflation expectations.
