On February 10, significant developments in U.S. trade policy took center stage as the White House announced a sweeping executive order imposing a 25% tariff on all imported steel and aluminum. The announcement made clear that there would be no exceptions or exemptions for any countries involved, marking a stark escalation in the U.S. tariffs that had first been imposed in earlier years. The aluminum tariff would see an increase from 10% to 25%, and all countries exporting steel to the United States would again face a 25% levy. This move not only reinstated taxes on steel but also broadened their scope to encompass crucial downstream products. The tariffs are set to go into effect on March 4, effectively extending the original findings of the 2018 Section 232 investigation into national security and trade. The announcement also included the cessation of the product exclusion process that had previously allowed certain imports to bypass the tariffs.
In the Oval Office, where these measures were signed, the President emphasized, "Essentially, we will levy a 25% tariff on all aluminum and steel materials without exception. This decision means we will see many businesses opening in the United States." He further elaborated that there would be no waiver for these tariffs and hinted at potential tariffs on other goods such as automobiles, chips, and pharmaceuticals. Meetings regarding these products are expected to take place within the next four weeks, further showcasing the administration’s approach aimed at bolstering domestic industries that hold considerable political significance.
However, these tariffs are likely to strain relationships with some of America's closest allies, who are expected to be adversely affected by these sudden changes in trade policy. Critics fear that such protectionist measures, while aimed at safeguarding U.S. industry, could lead to retaliatory tariffs from other countries, escalating into a broader trade conflict. The reverberations of these policies will likely touch many sectors of the economy, with businesses grappling with increased costs of raw materials and potential disruptions in supply chains.
In the backdrop of these developments, market observers noted a sense of relief following the results of the latest Federal Reserve survey, which offered a glimmer of hope amid inflationary concerns that had surged after the Michigan Consumer Sentiment Index reported alarming figures. According to the Fed's survey, inflation expectations for the coming year remained steady at 3%, while five-year expectations climbed from 2.7% to 3%. This marked the highest level since May of the previous year, indicating that consumer sentiment surrounding inflation remains divided. Responses to the survey revealed significant disparities in inflation outlooks, illustrating how various segments of the population perceive economic stability differently.
Market analysts have pointed out that in the context of proposed tariffs targeting U.S. trade partners, inflation expectations now play a crucial role in discussions surrounding future monetary policy actions from the Fed. Officials have expressed that their responses to price increases stemming from tariffs would hinge significantly on whether inflation expectations remain well-contained. Given the current economic landscape, policymakers are tasked with navigating through rising concerns related to inflation while also responding to the complexities of international trade.
Today, as traders keep a close eye on events around the globe, they eagerly await economic data releases, including France's ILO unemployment rate for the fourth quarter, the NFIB small business confidence index for January from the U.S., and December’s building permits figures from Canada. These indicators will shed light on the health of economies both within and outside the United States, potentially influencing market sentiment and trading strategies moving forward.
In the commodities market, gold has emerged as a standout performer, experiencing a remarkable surge through the week. The price swelled dramatically, bolstered by the uncertainty created by the implementation of new tariffs and the looming threats that shape global trade dynamics. As a result, gold broke through the significant milestone of $2,900 and reached new all-time highs, with current trading sitting around $2,916. This increase can be attributed to the heightened risk aversion among investors looking for safer assets amidst a deteriorating global trade environment. Much of this is driven by fear and uncertainty regarding the consequences of escalating tariffs.
Moreover, as gold overcame substantial selling pressure at the $2,900 mark, this breakthrough attracted technical buying from traders who reacted to the newly established support level. Such bullish sentiments could propel gold prices higher, with the market now keenly focused on the pressure levels around $2,930 while the floor sits at the $2,900 vicinity.
The currency pair USD/JPY also saw fluctuations, experiencing minor gains while trading around the 152.00 mark. Support stems in part from short covering and the rising dollar index, helped along by diminishing expectations of imminent Federal Reserve rate cuts due to fears of elevated inflation driven by tariffs. Nonetheless, the outlook remains complex, with expectations for a potential Bank of Japan interest rate hike curbing further upside potential for the currency pair.
Similarly, USD/CAD demonstrated resilience, with the exchange rate hovering around 1.4330 as it absorbed fluctuations driven by short covering and the overarching dollar strength. Yet, the notable rebound in oil prices appears to limit the upside potential for this pair. Traders will be attentive to pressure points near 1.4400 while keeping a lookout for solid support in the 1.4250 range.
As the economic landscape evolves, stakeholders across various sectors will continue scrutinizing developments from the trade front, watching closely how these tariffs may reshape not just the U.S. economy but also international market dynamics. With the interplay of tariffs, inflation expectations, and currency fluctuations, the path forward is fraught with complexities, presenting both challenges and opportunities for investors navigating this tumultuous environment.