Markets adjust to Trump’s rhetoric

Dollar doesn’t enjoy Trump’s second term

The dollar remains on the back foot as Trump continues to unveil his plan for the next four years. Hopes for a relatively quiet start to his term have been shattered as, following the announcement to impose tariffs on Mexico and Canada - which was expected since both countries were targeted during Trump's first term - the US President has turned his focus to China and the European Union.

While the recent Trump-Xi call appeared to delay decisions about trade restrictions, Trump announced his intention yesterday to impose a 10% tariff on China, reminding the markets that he won’t back down from his pre-election promises to support the US economy at the expense of its trade partners. While this tariff level is much lower compared to the 60% figure touted ahead of the November election, Trump sees it as a good starting point, which could quickly be increased if China doesn’t abide by his rules.

Similarly, Europe is next on Trump’s agenda, which isn’t surprising considering the fact that Trump has always been critical of Europe’s decision to buy Russian gas and oil. Compared to the 2017-2020 period, though, Europe has lately been forced to turn elsewhere to cover its energy needs. This situation suits Trump in his quest to secure buyers for his “drill everywhere” strategy. Interestingly, oil prices are in freefall after hitting a 7-month high of 80.59.

February 1 appears to be the next key date for tariff announcements, casting a shadow over the January 29 Fed meeting. There are increasing expectations that trade restrictions will result in higher inflation and lower global growth, but the Fed, at this stage, has to adopt a “wait-and-see” approach and observe the tariffs show.

Mixed market sentiment

The mixed market movements continue, as Trump’s announcements about significant investment in AI support risk sentiment, pushing stock indices higher. European indices are leading the way, with the German DAX40 index climbing by 5.7% in January, despite the bleak outlook for the German economy and the February election. Similarly, the crypto market is experiencing sizeable gains in January, with the US-based XRP and Solana setting the pace. Bitcoin is up 13% this month, while Ethereum is lagging.

On the flip side, tariffs' talk seems to support gold. The official start of Trump’s second term has kicked off another rally, with gold surpassing the November and December highs, and climbing to the $2,750 region. Following a record-breaking 27% rally in 2024, the precious metal is already up 5% in 2025, outperforming most US equity indices.

BoJ looks determined to hike

Amidst this fluid environment, the BoJ is preparing for Friday’s rate-setting meeting. The market is currently pricing in an 88% probability of a rate hike, which seems sensible considering the recent data prints and the positive newsflow regarding the next round of wage negotiations. Assuming that Trump doesn’t escalate his trade strategy or try to “adopt” Greenland until Friday, Governor Ueda will most likely announce a 25bps rate hike and provide a much-needed boost to the yen.