S&P 500 gains to extend record run, set for positive week
The initial market reaction on tariffs decision by the US President Donald Trump saw a spike in the USD and implied FX volatilities at the beginning of the week. However, the situation quickly evolved as the U.S. announced a one-month delay in the implementation of tariffs against its USMCA partners, contingent on border security commitments from Canadian and Mexican authorities.
This development resulted in the Canadian dollar (CAD), Mexican peso (MXN), and Chinese yuan (CNH) recovering from their initial losses, stabilizing the broad USD to levels observed at the end of the previous week. The EUR/USD pair, which had dropped to 1.0141 on Monday, rebounded and was trading close to 1.04, nearly returning to its position before the weekend’s tariff announcement, despite ongoing threats of U.S. tariffs on the euro area.
Markets appear to be discounting the tariff threats, treating them more as a negotiation tactic rather than a definitive policy shift. This perspective has been reinforced by the quick de-escalation of the tariff situation with USMCA partners and by the transactional nature of the U.S. interactions with Canada and Mexico. The pattern of trade deadlines being extended at the last minute is reminiscent of the 2018-2019 US-China trade disputes, suggesting a potential for negotiation and a less severe outcome.
Despite the surface volatility in spot FX markets, there are signs of a more profound pro-USD impact from the tariff announcements. U.S. inflation breakevens are on the rise, indicating that the market is pricing in the inflationary risks of tariffs, which could constrain the Federal Reserve’s ability to ease monetary policy.
Conversely, expectations of tariff-induced growth threats are leading markets to anticipate further rate cuts by non-U.S. central banks, particularly the European Central Bank (ECB). This is evidenced by the December 2025 Euribor implied yields now falling below the 2.0% neutral rate estimate, despite a higher-than-expected euro area January Consumer Price Index (CPI) of 2.5% year-over-year, which could suggest a more cautious ECB policy approach.
UBS analysts maintain a bullish USD stance, asserting that the potential for tariffs justifies a higher USD level relative to rate differentials. The firm believes that as long as the possibility of tariffs lingers, even with delays, the USD is likely to remain supported.
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