US President Donald Trump has formally agreed to impose 25 percent tariffs on Canada and Mexico and 10 percent additional tariff on China. Import prices will rise as a result of the increase in tariffs, and consumers will pay the higher prices.
There are advantages and disadvantages. If imported goods are manufactured locally, it should boost the domestic market, generate jobs, and raise revenue collection. But it is too soon to predict how much cash flow will increase.
Canada has said that their counter plan is in progress. Canada is also going to impose 25 percent levies in response to the US tariffs of CAD 155 billion, or USD 106 billion, worth of imports from the United States.
It is anticipated that CAD 30 billion tariffs will go into effect on Tuesday, and CAD 125 billion over the next 21 days. Nearly 60% of Canada’s crude oil exports, or 4 million barrels per day, go to the US, which will raise the price of diesel.
And we will have to wait and watch how Mexico reacts. The economy minister has already been asked by the President to respond back to protect their country’s interests.
China’s foreign spokesperson has said “China firmly deplores and opposes this move and will take necessary countermeasures to defend its legitimate rights and interests”.
Importantly, both Canada’s Mexico’s exports are estimated to contribute close to 20 percent of the US GDP. Therefore, it goes without saying that such countermeasures will cause inflation.
However, it will also keep Europe and other nations on edge until it is quickly resolved or postponed for negotiations.
The counterattacks from the other side could impact the global financial landscape.
In the meantime, Fed’s preferred inflation indicator, Personal Consumption Expenditure (PCE), which showed an increase in headline prices and core inflation that stayed high, does not suggest a rate decrease. Because of ongoing inflationary pressures, Fed policymakers may postpone lowering interest rates for a while. They will continue to rely on data because of the Fed’s cautious viewpoint.
Following its January 24 rate hike of 0.25 percent, the BOJ (Bank of Japan) may raise rates as a result of ongoing inflationary pressures. Japan’s CPI has increased at the quickest rate in almost a year, which has kept demand for Japanese yen. Interest rates will probably be raised by the BOJ if inflation stays steady and wage growth continues to be strong. At this pace, the increase in interest rates and monetary support might be combined.
Even though the Fed’s decision to pause on Wednesday, due to economic concerns, the European Central Bank had to cut its deposit rate by an additional 1/4 percentage point to 2.75 percent last week.
Meanwhile, recent data of weakness in the British economy suggest that interest rates may be lowered. The Bank of England may lower its benchmark interest rate by 0.25 percent on Thursday, which would put pressure on the value of the Pound Sterling.
However, the market will undoubtedly pay attention to the release of economic data in order to provide guidance. Earlier this week, the ADP employment, JOLTS job openings, ISM Manufacturing PMI and ISM Services PMI will be made public.
In addition to the crucial Nonfarm Payrolls data on Friday, the preliminary University of Michigan Consumer Sentiment and US weekly jobless claims data will be revealed later this week. Potential market reaction to tariff hike
The US Dollar primarily benefits during the times of financial market volatility.
But even though the Fed kept its interest rates unchanged, the tariffs issue caused gold to soar to all-time highs as investors hurried to purchase the metal, which is considered a safe haven.
Gold will continue to be in demand until the present tariff problem is eased.
The tariff battle will ultimately keep the market extremely volatile even if gold is overbought and will finally correct. The market is anticipated to react strongly because the tariff problem has not been resolved.
Initially, gold will also be purchased.
Until the tariff dispute is handled, the financial market will remain incredibly unstable and erratic for a while.
Significant drops in the US and international stock markets won’t shock this writer.
#GOLD @ USD 2801— Bias will continue to be upward as long as gold holds support between USD 2778-80. Break of USD 2828-30 will encourage for a test at USD 2845 or cab push gold towards USD 2880-90 zone.
#EURO @ 1.0362— Pressure on the Euro will continue, and it should stay below 1.0480 for 1.0260 or 1.0210. If not, 1.0520
#GBP @ 1.2390— Pound Sterling could ease initially. But later it could move up towards 1.2470-90 or 1.2520 if 1.2310-20 is not broken. If not, the slide may continue to 1.2140.
#JPY @ 155.18- The USD has support at 154.10 or 153.50. In order to reach 157.20, it must penetrate 156.40 levels. Volatility is still a good possibility.
Copyright Business Recorder, 2025
The writer is former Country Treasurer of Chase Manhattan Bank. The views expressed in this article are not necessarily those of the newspaper
He tweets @asadcmka
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