This weekend the US successfully used the threat of tariffs on Colombia to secure its policy objective of deporting illegal immigrants. The use of tariffs as a policy lever now appears well understood by the market and may be worth it to reduce marginal volatility, notes ING FX analyst Chris Turner.

"FX markets are still operating on the potential 1 February deadline for tariffs on Mexico, Canada and China – and that should prevent the dollar from correcting too much this week. Instead, focus may shift back to the macro side given a slew of central bank rate meetings, Q4 GDP data and some key inflation figures around the world." "Overall, we think Wednesday's FOMC meeting should not be a negative event risk for the dollar as US activity data has been quite strong. The bigger risk for the dollar could come from the release of December core PCE inflation data on Friday. Here, a 0.2% m/m reading could suggest inflation is not as worrisome as some fear and see the market pricing for a Federal Reserve easing cycle this year shift to 50bp from the current 43bp."

"We suspect investors are quite comfortable running long USD positions at the moment and would not be surprised to see the DXY return to the 108.50/108.80 area in a quiet market. Expect a lot of focus on US equity markets this week too. Many of the big tech stocks are releasing Q4 earnings results at a time when Chinese AI firm Deepseek is starting to question whether large amounts of investment are needed to achieve similar results. This calls into question the barriers to entry currently enjoyed by US tech stocks."(AL)

Source: FXstreet