Markets React as Trump Pauses Tariffs, Earnings Season Kicks Off Amid Global Currency Shifts | Daily Market Analysis

Key events:

• USA - JOLTS Job Openings (Dec)
• USA - FOMC Member Bostic Speaks
• USA - FOMC Member Daly Speaks

US stocks ended lower on Monday but pared earlier losses after President Donald Trump announced a temporary halt to planned tariffs on Mexico, easing fears of an escalating global trade war.

The Dow Jones Industrial Average slipped 161 points (0.4%), while the S&P 500 dropped 0.9%, and the NASDAQ Composite fell 1.3%.

Beyond the ongoing tariff debate, investors are turning their attention to one of the most crucial weeks for fourth-quarter earnings. More than 120 S&P 500 companies are set to release their financial results, providing key insights into corporate health and broader market direction.

Among the most anticipated reports, Alphabet (NASDAQ: GOOG) and Amazon (NASDAQ: AMZN) are scheduled to announce their quarterly earnings on Tuesday and Thursday, respectively. Their performance will be closely watched as investors assess the impact of economic uncertainty on major tech firms.

The Australian Dollar staged a recovery on Tuesday, breaking a six-day losing streak as the AUD/USD pair gained momentum amid a weakening US Dollar.

However, the sustainability of this rebound remains uncertain, with speculation growing that the Reserve Bank of Australia may move toward a rate cut as early as February. The RBA has held the Official Cash Rate (OCR) at 4.35% since November 2023, maintaining its stance that inflation must return to the target range of 2%-3% before any easing measures are implemented. Analysts at Westpac suggest that expectations for a rate cut at the February 18 Board meeting will likely remain stable this week, reinforcing their forecast of a total of 100 basis points in cuts throughout 2025. However, market expectations remain more cautious, leaving room for potential surprises in the months ahead.

Meanwhile, the Japanese Yen continues to struggle against the US Dollar, maintaining a bearish bias as the USD/JPY pair holds above the key 155.00 level during the Asian trading session. Market attention is turning to an upcoming meeting between Japan’s Prime Minister Shigeru Ishiba and former US President Donald Trump later this week. Given Japan’s significant trade surplus with the US, any discussions surrounding potential tariffs could introduce fresh volatility for the Yen. Japan’s Finance Minister Katsunobu Kato emphasized on Monday that the government will closely monitor the impact of Trump's new tariff policies on Japan’s economy, adding to concerns over potential economic headwinds.

The Bank of Japan’s Summary of Opinions, released on Monday, revealed that board members are considering further interest rate hikes, provided economic activity and inflation remain on track. Additionally, inflation data from Tokyo showed core prices rising at their fastest annual pace in nearly a year, reinforcing the case for tighter monetary policy. However, despite these developments, the downside for the Yen appears somewhat contained. Market participants expect the Federal Reserve to implement at least two rate cuts before the end of the year, which could narrow the US-Japan interest rate differential and limit further JPY depreciation. The USD/JPY pair, as a result, remains capped below the mid-155.00s.

The British Pound is extending its gains for a second consecutive session, with GBP/USD hovering around the 1.2430 mark during Asian hours on Tuesday. Despite this upward momentum, the Pound faces potential headwinds as investors prepare for the Bank of England’s upcoming policy decision on Thursday. Market sentiment suggests the BoE may initiate its policy-easing cycle with a 25-basis-point rate cut, bringing interest rates down to 4.5%.

Traders widely anticipate a dovish stance, particularly as inflation in the UK continues to show signs of moderation. However, wage growth remains a lingering concern, creating a degree of uncertainty surrounding the BoE’s decision-making process. The Monetary Policy Committee (MPC) is expected to vote 8-1 in favor of the rate cut, with one member likely advocating for keeping rates unchanged for now.

In North America, the Canadian Dollar saw a sharp recovery as the USD/CAD pair dropped toward 1.4410 in late American trading hours on Monday. The Loonie rebounded from its lowest levels since 2003 following an announcement from former US President Donald Trump confirming the postponement of planned tariffs on Canadian goods.

In a statement on Truth Social, Trump indicated that he would delay imposing 25% tariffs on imports from both Mexico and Canada for one month, reversing an earlier decision to introduce these measures immediately. The Canadian Dollar quickly attracted buyers in response to the news, offering some relief to the struggling currency.

Later on Tuesday, speeches from Fed policymakers Raphael Bostic and Mary Daly could provide additional clues regarding the central bank’s monetary policy outlook.