Headlines have been chock-full of the blowup between US President Donald Trump and his Ukrainian counterpart Volodymyr Zelenskiy over the weekend. However, the focus of markets seems to be on the impact of tariffs on Canada, Mexico, and China starting Tuesday. Both situations fold into a geopolitical landscape pushing gold prices higher and rattling forex markets.
The initial reaction to the Ukraine issue appears to have had disparate results on either side of the Atlantic. The emergency meeting of European heads of state on Sunday resulted in pledges to increase spending to support defense in Europe. That appears to be the catalyst behind the rise in European bourses, led by the DAX. But investors are also concerned about the potential fiscal impact of the spending, which contributed to a rise in benchmark yields, and a higher Euro. Hope of reaching a truce in Ukraine was also seen as giving the pound a boost as well.
Beyond the Headlines
Gold was one of the gainers over the weekend. The increase in geopolitical uncertainty would naturally support the safe haven. But investors seemed more focused on the impact of tariffs, contributing to inflationary pressure and reversing gold’s decline. The yellow metal had been trending lower last week on optimism that a deal would be made with Ukraine but has been trending higher since the weekend.
Some analysts seem to be holding out for a last-minute reprieve on the tariffs, at least for Mexico and Canada. US Secretary of Trade, Harold Lutnick on Sunday suggested that the tariff situation was “fluid”, and Trump would ultimately decide how much tariffs would be applied. This opened the door to the possibility of a lower tariff rate, or certain goods being excluded. One of those could be crucial for the CAD, which is the export of crude oil to the US.
The Worrying Situation
Another bit of data coming out over the weekend that is top of mind for traders is a revision to the downside in US Q1 economic projections. The Fed’s GDPNow turned negative for the first time since 2022, now expecting the US economy to grow at -1.5 in the first quarter. However, the change was largely attributed to a large – and likely transitory – increase in the trade deficit as businesses looked to stock up ahead of tariffs.
Typically, tariffs (or the threat of them) would support the dollar, which has happened in the past. But, the lack of confidence in the US economy apparently has left yields declining. There has been so much talk about tariffs that the upside for the greenback has likely already been priced in. As a result, the market might be normalizing now that the tariffs are being implemented.
The Currency Outlook
There is a series of important data points coming up this week, with the two most likely to shift currency markets being the ECB rate decision and US Non-farm payrolls. Barring surprises in either of those events, markets seem to be adjusting to the tariff situation, with the dollar easing on a softer economy. Increased spending in Europe is helping push the Euro higher, allowing it to move away from the risk of falling back to parity. The pound has been taking a similar trajectory.
The geopolitical turmoil has continued to generally support safe havens, with commodity currencies at risk as investors remain uncertain about the impact of tariffs. Once the full details are available on the levies, then investors might have a better view of how commodity currencies will perform.
