The market is becoming increasingly desensitized to the threat of tariffs, as the credibility of these threats remains inconsistent. The tariff story has been front-run aggressively since November, December, and January, and with no immediate follow-through, the fear factor has dissipated.
Another major macro theme is the potential end of the Russia/Ukraine war, as Zelensky faces limited options with Trump likely to withdraw US support. This has triggered a strong bid for peripheral European assets (PLN, HUF, etc.), underpinned by expectations that a post-war Ukraine rebuild and improved trade balances will benefit Europe. The opposing argument is that a Europe left to handle Russia alone could face structural economic risks, but that remains a geopolitical rather than purely economic issue.
Also, markets are still trying to sustain the narrative that Bessent (Trump’s Treasury Secretary) will be able to push 10-year yields lower. While CPI came in hot, it wasn’t strong enough to keep yields elevated, especially with the Fed on indefinite hold.
USD: Lack of Catalysts
Positioning: Net long, but shorts are increasing as the market rebalances.
- The market has exhausted its ability to hold large long USD positions, given that tariffs aren’t materializing as aggressively as expected, economic data is steady, and there is no chance of Fed rate hikes.
- Global equity markets are outperforming the US, making it harder for USD to sustain gains as capital shifts away from the MAG7 trade.
- USD bulls now need a constant stream of good news for the dollar or bad news for Europe, and neither is materializing at the pace required to sustain DXY at these levels.
- Similar to 2017, when traders aggressively longed USD after Trump’s election, only to see it decline all year, the lack of immediate policy actions may once again weigh on the currency.
Europe: Demand for Ukraine Peripherals
- The potential resolution of the Russia/Ukraine war has triggered a wave of buying in EUR, PLN, SEK, HUF, and NOK, as markets anticipate long-term regional economic benefits.
- A key moment for will be this weekend’s meetings in Munich, where Zelensky’s willingness to negotiate under pressure from Trump and Putin will be closely watched.
- Another major FX risk event is the German Federal election on February 23.
Speaking of German elections, here’s a scenario rundown
CDU-SPD coalition, Greens helps to two-thirds majority
- Probability: High
- EUR/USD Impact: Positive
CDU-Greens coalition, SPD helps to two-thirds majority
- Probability: High (but slightly lower than first scenario)
- EUR/USD Impact: Positive
Mainstream coalition but AfD + BSW win one-third blocking minority
- Probability: Low
- EUR/USD Impact: Negative
SPD/Greens win majority
- Probability: Very Low
- EUR/USD Impact: Negative (Tax hikes)
-William Lun
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