The US dollar extended its decline this week, building on last week’s retreat that ended a six-week rally. Renewed risk appetite emerged after discussions between former President Donald Trump and Chinese President Xi Jinping on trade, TikTok, and fentanyl, setting a potential tone for US-China relations that could have significant implications for global forex markets.
High-Risk Events to Watch:
- Trump’s Policy Agenda: Market sentiment hinges on Trump’s ability to swiftly implement his policy agenda, with measures such as tax cuts, higher tariffs, and stricter immigration controls expected to influence inflation and US dollar strength. These policies carry substantial risks of inflationary pressure, which could underpin the dollar while keeping Treasury yields elevated, driving potential currency market volatility.
- Energy and Climate Actions: Trump’s administration plans an aggressive rollout of executive orders post-inauguration, including the invocation of emergency powers to boost domestic energy production. This move could significantly alter the outlook for petro-currencies if oil markets react strongly. Efforts to reverse climate-related policies could further shift global trade dynamics, influencing currency pair movements and adding to forex market volatility.
- Bank of Japan’s Policy Decision: Later in the week, the forex market’s attention turns to the Bank of Japan’s policy decision on Friday. A survey shows nearly three-quarters of economists expect a rate hike. BOJ officials reportedly view such a move as likely, provided Trump’s early actions don’t trigger immediate market shocks. Any BOJ rate action could significantly impact the yen and cross-pairs involving JPY, making it a critical event for forex traders.
- World Economic Forum in Davos: The annual gathering in Davos, Switzerland, also draws investor focus, with notable figures such as BlackRock’s Larry Fink, Bridgewater’s Ray Dalio, and Salesforce’s Marc Benioff attending. Trump’s virtual address three days after his inauguration could provide clarity on his economic vision and its forex market implications, especially for emerging market currencies sensitive to US policy shifts.
As forex traders assess the interplay of US-China relations, Trump’s domestic policy shifts, and global central bank actions, vigilance is paramount. Strategic positioning around these high-risk events will be critical to navigating potential volatility in currency markets.