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FX Update: Trump may declare national emergency? USD spikes higher.
John J. Hardy
Chief Macro Strategist
Résumé: The US dollar spiked higher today, possibly in part on CNN running a story that Trump may be set to declare massive tariffs on day one of his presidency, according to sources.
Trump to declare national economic emergency on day one of his presidency?
The US dollar spiked higher still today, with EURUSD slicing down below 1.0300, GBPUSD plunging well through 1.2400 (extra negative sterling focus – see more below), and USDJPY testing cycle highs despite recent warnings on excess JPY moves from Japanese officialdom. We can only imagine where the US dollar might trade versus the Chinese currency if the PBOC was not heavily intervening to prevent the USDCNH rate from trading north of the double top posted in 2022 and 2023 at 7.375. Significant volatility potential across markets if China lets this level go.
One likely driver of an acceleration in the move intraday was a CNN story suggesting that Trump may look to declare a national economic emergency on the first day in office to justify the imposition of universal tariffs on both global friends and adversaries. The CNN article suggests the story has four sources. The emergency declaration would be needed as a part of leveraging the International Economic Emergency Powers Act (IEEPA) that authorizes a US president to make such moves in the event of a national emergency.
This headline runs in the opposite direction of the Washington Post headline earlier this week on Monday suggesting Trump might look for a more targeted approach to imposing tariffs as opposed to a broad-based one. Could today’s CNN story also face a direct rebuttal from Trump? It would seem somewhat less likely to get the same treatment from the president-elect, as he likes to keep the anticipation high that he is willing to make bold moves. Still, Trump’s actual tariff policy remains entirely unknown and could prove a hybrid of both broad-based and targeted approaches that may or may not start at lower levels than feared and may or may not include scheduled increases until the nations targeted change course. There are no guarantees until the ink is drying.
Chart: GBPUSD
The US dollar was higher across the board yesterday as US treasury yields also rose on the very hot ISM Services Prices Paid print for December yesterday. The acceleration today may be on the story that Trump may be planning to announce broad tariffs on day one of this presidency. Sterling was under additional pressure as rising global yields are aggravating UK yields, which could weigh on the UK growth outlook. GBPUSD posted a new low for the cycle below 1.2350 today, just a day after rising above 1.2550 on a story suggesting Trump might go soft on tariffs. Headline risks are here to stay for now. Looking lower, the next key level is the early 2024 low near 1.2300, followed by the psychologically important 1.2000 area which has held since early 2023.
The market reaction today shows once again how sensitive market participants are to incoming policy from the Trump administration, making it difficult for position takers to assess risk levels and even to hold onto positions for very long once taken. It will also likely mean that reaction to the rest of the data points through the end of the week may not stick around for long, even with significant surprises.
It is worth noting that the US dollar was already on a strong footing again coming into today after the US December ISM Price Paid index yesterday posted a 64.4 reading versus 57.5 expected, spiking US treasury yields to new cycle highs. Yields have continue higher today and trade above 4.70%, leaving only the 5.0% level that briefly traded in late 2023 as the final line in the sand.
An especially rough ride for sterling today as the UK faces stagflation
Sterling sold off hard today, even after an auction of 5-year UK Gilts that drew stronger demand than the previous auction. That 5-year Gilt yield rose to its highest level since late 2023, challenging above 4.5% today. This came the day after 30-year UK Gilt yields rose to new 26-year highs above 5.21%, higher than they traded during the late 2022 supplementary budget crisis during Prime Minister Liz Truss doomed tenure and at any time since 1998.
Importantly, especially longer UK Gilt yields are rising more rapidly than global counterparts, reflecting concerns that the UK is slipping into a stagflationary spiral, a significant threat to the currency as higher yields will force greater fiscal discipline/austerity on the UK government and likely slow growth. A country’s funding costs soaring above 5% at the long end of the yield curve when its real growth has struggled at sub-1% levels over the last two years is an ugly set of circumstances, indeed.
Looking at EURGBP of late, there hasn’t been much of a reaction to the UK’s plight, perhaps in part as the higher UK yield and stickier BoE policy rate has been seen. But with higher CPI readings in Germany this week and a big pop in yields globally, sterling is finding itself in the hot seat once again. EURGBP caught fire today and rose to a multi-week high above the key 0.8330 area – watching this level as an important one for whether sterling continues to underperform broadly.
Table: FX Board of G10 and CNH trend evolution and strength.
Note: the FX Board trend indicators are only on a relative scale and are volatility adjusted. Readings below an absolute value of 2 are fairly weak, while a reading above 3 is quite strong and above 6 very strong.
USD strength has suddenly accelerated again and sterling weakness has made a quick return – will follow through strongly in the trending readings tomorrow if today’s move lower in sterling holds.
Table: FX Board Trend Scoreboard for individual pairs.
The USD trend has held for a long time now – 14 weeks in the case of USDSEK. Note the EURGBP attempt to get an upside breakout going today, and note the last JPY crosses trying to establish an upside trend in recent days (AUDJPY and NZDJPY) as spiking global yields are not the JPY’s best friend, although JPY is holding its own today in many crosses.