USD: Some data to watch amid tariff news - ING

The US Dollar (USD) has continued to lose ground since the US border deal with Mexico and Canada was agreed on Monday. The focus is now on China, and a relatively measured response by Beijing to Trump's tariffs is keeping markets optimistic that some deal can be struck before China's retaliatory tariffs kick in on 10 January. AUD/USD - a key proxy for China sentiment - has entirely erased its short-term risk premium (i.e. undervaluation), ING's FX analyst Francesco Pesole notes.

Protectionism story remains the key driver

"A consensus US-China deal does seem the most likely scenario, but we sense markets are under-pricing the risk of a more prolonged trade spat. Tariffs on China aren't as impactful on US consumers/producers as those on Canada and Mexico, and that allows Trump to take his time to discuss a deal. Indeed, Trump has indicated he is in no rush to speak to China's President Xi Jinping. We suspect the balance of risks for the likes of AUD and NZD - which are pricing in a deal - is skewed to the downside."

"In other news, markets are treating Trump's announced intention to take over the Gaza Strip and evacuate Palestinians to neighbouring countries with scepticism. Should we see hints that the US is planning to deploy troops in the Middle East, the market implications can be risk-off, oil-positive and dollar-positive, as Arab nations should firmly oppose the move. For now, the protectionism story remains the key driver, even though US macro news is regaining some centrality."

"Today, we'll get ADP employment figures for January, which are expected to come in a bit stronger than December at 150k. Those have not had good predictive power for actual payrolls, but can still move the market. The other important release of the day is the ISM services surveys; the consensus is for consolidation in the main index around 54, although greater scrutiny should be on the price paid subindex, which spiked to 64 in December, sparking inflation concerns."