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Key Highlights

• EUR/USD declined heavily and opened lower below 1.0320.
• It traded below a key bullish trend line with support at 1.0370 on the 4-hour chart.
• Bitcoin and Ethereum declined heavily and the greenback rallied.
• GBP/USD also declined and traded below the 1.2300 level.

EUR/USD Technical Analysis

The Euro started another decline from the 1.0530 zone against the US Dollar. EUR/USD traded below the 1.0450 and 1.0420 support levels to enter a bearish zone.

Looking at the 4-hour chart, the pair settled below the 1.0350 level, the 100 simple moving average (red, 4-hour), and the 200 simple moving average (green, 4-hour). The bears seem to be in control and might aim for more losses.

On the downside, immediate support sits near the 1.0210 level. The next key support sits near the 1.0200 level. Any more losses could send the pair toward the 1.1165 level.

On the upside, the pair seems to be facing hurdles near the 1.0270 level. The next major resistance is near the 1.0300 level. A close above the 1.0300 level could set the tone for another increase. In the stated case, the pair could even clear the 1.0350 resistance and the 100 simple moving average (red, 4-hour).

Looking at Bitcoin, there was a sharp decline and the price traded below the $95,000 support zone.

Upcoming Economic Events:

• Euro Zone Manufacturing PMI for Jan 2025 – Forecast 46.1, versus 46.1 previous.
• UK Manufacturing PMI for Jan 2025 – Forecast 48.2, versus 48.2 previous.
• US ISM Manufacturing PMI for Jan 2025 – Forecast 49.5, versus 49.3 previous.

China’s Caixin Manufacturing PMI edged down to 50.1 in January from 50.5 in December.

According to Caixin Insight Group, manufacturers saw improved logistics and a slight pickup in supply and demand. However, employment levels deteriorated notably, and new export orders remained weak, reflecting sluggish global demand.

External risks also remain a key concern, with rising geopolitical uncertainty adding pressure to China’s export environment. Disruptions in global trade policies could further dampen overseas demand, making it difficult for manufacturers to sustain current production levels.

Domestically, consumer spending remains sluggish, highlighting the need for policy measures aimed at boosting disposable income and restoring confidence.

Full China Caixin PMI manufacturing release here.

Japan's PMI Manufacturing was finalized at 48.7 in January, down from December's 49.6. This marks the sharpest decline in output since March 2024, as firms faced a steeper drop in new orders. Weak demand conditions forced manufacturers to scale back production, reflecting ongoing headwinds for the sector.

According to S&P Global, businesses reacted to falling demand by cutting both inventories and raw material holdings, while also reducing input purchases at the fastest pace in nearly a year. Employment growth also slowed, highlighting a cautious approach to hiring amid economic uncertainty.

Despite the downturn, manufacturers maintained a positive outlook for future output, though confidence fell to its lowest level since December 2022. While firms expect a recovery in demand, concerns persist over when such an improvement will materialize. The slowdown in input price inflation to a nine-month low provides some relief, but overall, sentiment remains fragile.

Full Japan PMI manufacturing final release.

Australia’s retail sales turnover edged down by -0.1% mom in December, a smaller decline than the expected -0.7% mom. While the contraction marks a pullback from the strong growth seen in previous months—0.7% mom in November and 0.5% in October mom—it suggests that consumer spending remains relatively resilient.

According to Robert Ewing, head of business statistics at the Australian Bureau of Statistics, retail activity was supported by extended promotional events, helping to smooth spending patterns over the quarter. He noted that Cyber Monday, which fell in early December, boosted demand for discretionary items, particularly furniture, homewares, electronics, and electrical goods.

Full Australia retail sales release here.

The long-anticipated escalation in trade tensions has officially materialized as US President Donald Trump imposed sweeping tariffs over the weekend. A 25% tariff is now in effect on imports from Canada and Mexico, while China faces a 10% levy on its exports to the US. The move, widely expected, marks the formal start of what is being called Trade War 2.0.

In immediate response, Canada announced retaliatory tariffs of 25% on USD 155B worth of US goods, while China indicated that it would file a case against the US at the World Trade Organization.

Dollar gapped higher as the week started in response to the development. USD/CAD broke through 1.4689 key resistance (2016 high) to resume the long term up trend. Technically, the next medium term target for USD/CAD is 100% projection of 1.2401 to 1.3976 from 1.3418 at 1.4993.

Though given the scale of uncertainty surrounding the trade dispute, further upside cannot be ruled out. A lack of near-term resolution could see USD/CAD extend even higher toward 61.8% projection of 0.9406 to 1.4689 from 1.2005 at 1.5270 before topping.

Monday, Feb 3, 2025

Tuesday, Feb 4, 2025

Wednesday, Feb 5, 2025

Thursday, Feb 6, 2025

Friday, Feb 7, 2025

Canada has been hit with its largest trade shock in nearly 100 years. RBC Economics now finds itself balancing the desire to produce a clear analysis with the recognition that the evolution of trade policies, and policymakers’ responses to them, still remains highly uncertain. Still, we now have a growing list of “knowns” compared to a week ago, allowing us to analyze this shock with greater confidence. As the landscape continues to evolve, RBC Economics will provide updates to our outlook, helping to build a deeper understanding of this major economic event. We continue to lean heavily on the RBC Economics Playbook To Measure A Tariff Shock as a model for assessing the outlook amid these uncertainties.

1. This is the most significant trade shock since the Smoot-Hawley tariffs of the 1930s, which are widely blamed for exacerbating and prolonging the Great Depression. This shock far surpasses the 2018 tariffs in magnitude, diminishing the value of that period as a helpful guide for the economic impact ahead. For context, in 2018, the U.S. average import tariff rose from 1.5% to roughly 3%. Under the new policy, the U.S. average tariff rate to nearly 11%, the highest average ratio since the 1940s. More importantly, this policy signifies a fundamental shift in a trade order that has endured for nearly a century, challenging the core economic principle that frictionless trade is a superior model.
2. A persistent tariff of this magnitude is recessionary for Canada. If sustained, our initial analysis suggests that tariffs of this size (based on many assumptions) could wipe out Canadian growth for up to three years, with the largest impacts in the first and second years. Our estimates align to the Bank of Canada’s findings which simulate that a 25% increase in tariffs across the board (U.S. and global) would reduce Canadian GDP ranging from -3.4 to -4.2 percentage points, compared to the baseline forecast. Similarly, an earlier model from the Bank of Canada estimated that GDP could drop by as much as 6 percentage points. By our calculations, such reductions could push Canadian unemployment rates up by between 2 to 3 percentage points. While the precise impact depend on a variety of assumptions – including monetary and fiscal policy responses – this is a significant negative shock to Canadian growth and poses a serious risks of unemployment rate increases.
3. Canadian retaliatory measures (25% on $155bn CAD, phased in) appear designed to asymmetrically challenge the U.S economy more than the Canadian economy. However, they will still function like tariffs do for any imposing country – by lowering growth and raising inflation on targeted goods. In the days ahead, we will focus on identifying where Canadians are most likely to experience inflationary pressures from these measures.
4. Canada’s manufacturing sector is most exposed, but the knock-on effects will also matter in many other indirectly exposed industries. As we’ve covered before, Canada’s manufacturing sector – which accounts for approximately 9% of Canada’s GDP and 70% of total trade with the U.S. – is particularly vulnerable to tariff impacts. Canada’s top 15 industries by trade with the United States, most of which are manufacturing based, represent nearly 3.1% of the country’s total workforce. A key area of concern is Canada’s motor vehicles sector, which is exceptionally integrated with the United States and Mexico. Parts can cross the border multiple times, meaning an end-product like a car may incur several rounds of tariffs.

   Notably, Canadian raw commodity exports are less likely to see a drop in U.S. demand as Americans lack substitutes for these goods. This likely encouraged a lower 10% tariff on energy products for Americans, as this particular imported good is one of the most likely to create a larger and more immediate inflationary burden for American producers and consumers.

   As outlined in our tariff playbook, we are mindful that secondary industries in the services sector, for example, are also likely to feel knock-on effects. Consider an auto plant that experiences reduced demand and is forced to lay off workers. These workers, in turn, are less likely to then go to restaurants, movie theatres or engage in other “discretionary” spending. This ripple effect leaves a variety of non-tariffed industries exposed to the broader economic shock, and are also somewhat challenging to model as they can be exacerbated by confidence and sentiment channels.

5. Tariffs are hitting the Canadian economy at a moment during which it is already struggling. Canada is still recovering from a major interest rate shock, and even as the Bank of Canada has cut interest rates by 200bps, the unemployment rate continues to rise, with the country is still operating with excess supply and below full capacity. GDP per capita has declined for eight of the past nine quarters, and business investment has been stagnant. Both cyclically and structurally, Canada’s economy is not well positioned to absorb a shock of this scale.
6. Tariffs will also be damaging to the U.S. economy. While the U.S. economy is starting from a relative place of strength (and is far less reliant on trade), it will face a shock large enough to adjust most forecasts downward on growth and upwards on inflation. Additional retaliatory policies from Canada and/or Mexico will likely exacerbate these impacts.

   Like in Canada, certain American regions and sectors will be more exposed. The U.S. manufacturing sector, in particular, has already been underperforming. Industrial production is little changed from a year ago and the sector has on aggregate shrunk since 2017. Washington’s tariffs are likely to hurt U.S. manufacturing competitiveness further and, worse, as we have argued before will not lead to significant re-shoring of manufacturing capacity.

   Moreover, comparisons to 2018 tariffs imposed upon China understate the economic impact for Americans. Canada and Mexico account for a combined 29% of U.S. imports as of 2023 (13.6% from Canada, 15.4% from Mexico) – more than twice the share combined compared to China (13.8%). In 2023, Canada was the top import source for 23 U.S. states and second largest for 11. Canada was also the top export destination for 36 states, and the second most important for another 8.

What We Are Watching For Next

The scope of economic impacts for Canada (and the U.S.) remains significant and, even with robust economic models, requires a consideration number of assumptions. As we continue to adjust our outlook based on new developments, the following elements will be critical variables:

Items that will worsen the impact

• Duration of the tariffs: Tariffs removed within a matter of weeks are likely to create a temporary stall for Canada. However, if they extend over a matter months (e.g. 3-6 months), Canada’s recessionary risks increase rapidly. The duration of the tariff isn’t just about the immediate shock (or recession) – the longer the tariffs last, the greater the structural damage (i.e. permanent) on the economy. For example, Canada’s manufacturing sector (the most trade sensitive) accounts for more than 10% of total Canadian business investment, and almost a quarter of total Canadian machinery and equipment investment. A prolonged slowdown in investment in this sector will further reduce Canadian economic potential in the longer-run and require an even larger long-term adjustment.
• Evolution of retaliatory measures or escalation of U.S. tariffs. Canada’s retaliatory measures appear aimed at reducing the duration of U.S. tariffs. However, additional adjustments in Canada (and Mexico) could further alter forecasts. Moreover, if the U.S. follows through on its threats to escalate tariffs in response to retaliation, we will need to make further additional adjustments in our analysis.

Items that can soften the impact

• A weaker Canadian dollar (stronger U.S dollar): The Canadian dollar has already weakened by 7% in the past 12 months and a further full offset equivalent to the 25% tariff/price increase seems unlikely. That said, any additional weakness in the Canadian dollar will buffer the price shock for Americans and reduce the expected drop in demand for Canadian tariffed goods.
• An appropriate fiscal policy response: Beyond the decisions around retaliatory measures, governments will have to make a series of choices and trade-offs around how they support Canadians through a recessionary-type environment, going above and beyond traditional “automatic” stabilizers. A tariff shock differs from a pandemic shock – it represents a structural shift in two countries’ most important trading relationship. There is no ‘unpause’ button on a trade conflict, even after the tariffs are potentially removed, and thus fiscal policy will not simply act as a bridge from one side to another, but also the investment in Canada’s next economic chapter. In that context, Canadian governments will now need to navigate:
  • The right amount of support. Unlike the global pandemic or Great Financial Crisis, Canada is experiencing (along with Mexico) an economic shock that is mostly unique to its economy – it won’t be expanding its deficit or debt level along with its global peers and thus benefit from “relative” comparisons by global bond markets. With federal finances already pushing up closely to so-called “fiscal anchors”, the rainy day fund isn’t as flush as some would have hoped. Meanwhile, excess spending should the length of the trade conflict be (hopefully) short, could exacerbate inflationary pressures that Canada is only now overcoming, complicating the job of the Bank of Canada. Given the length of the conflict is likely more determined in Washington than Ottawa, this represents a particular challenge.
  • The right targets for support: The tariff shock is, likely to flow through both the goods and services side of the economy, but it will absolutely hit some areas much more than others. Broad-based support, as we saw in the pandemic, is likely to be less effective than appropriately targeted support that stops the bleed from tariffed sectors to non-tariffed sectors. Decoding which sectors need the urgent support will be a critical first step. We will write more on this in the coming weeks.
  • The balance of short-term vs. long-term support: the longer the tariff shock, the more Canada will have to spend to re-orient its economy towards a shifting trade order. That will have to happen in parallel with near-term support to soften the depths of a possible recession. Unlike the pandemic, we suspect that even a reversal of U.S. tariff policy would not eliminate a growing thirst for Canadian trade diversity and economic independence will grow in the years ahead.
• A supportive monetary policy response: Our base case expectation has been that the BoC was already on its way to cutting interest rates to about 2% by year-end 2025 and we suspect a tariff shock that produces a recession (even if it has inflationary elements) would put the BoC on an even more dovish track. All central banks are challenged by tariff shocks because they tend to raise prices but also lower growth. Further, the monetary policy response will need to be calibrated with the fiscal response ahead (more fiscal implies less need for monetary and vice versa). Our expectation is that, based on what we know now, the risks of additional easing over the baseline expectations for 2025 is growing. Regardless, we’ll be monitoring for commentary (and/or) action from the BoC that would ameliorate interest rate burdens (and indirectly help support further weakening of the Canadian dollar).

The new week will focus on the US labour market and the UK rate decision.

On Tuesday, 4 February, the focus is on the new US job opening statistics. The indicator’s fall over the past two years was viewed with alarm, but the figure has stabilised in the region of the 2019 highs. A rise would be a strong positive signal.

Wednesday, 5 February, sees the release of ADP private sector employment data. This is the closest indicator to Friday’s NFP. The indicator has been adding at a slightly below-trend pace in recent months, but so far, the labour market as a whole has not turned around. Surprises can’t be ruled out here, though.

On Thursday, 6 February, the focus is on the Bank of England’s key rate decision. Markets are expecting a 25-point cut. The central forecast is for two more cuts within a year. Signalling a change in this expected trajectory will be the main driver of UK markets. More declines will increase pressure on the pound.

On Friday, 7 February, all eyes are on Nonfarm Payrolls. Often, markets are quiet, going into a waiting mode a day before the release. The last couple of months have seen growth rates above the trend of 200K, also working to strengthen the dollar. However, strong data can also trigger a sell-off in stocks.

•  Dow Jones reversed from strong resistance level 45000.00
• Likely to fall to support level 44235.00

Dow Jones index today reversed down from the resistance area located between the strong resistance level 45000.00 (which stopped the previous multi-month uptrend in November) and the upper daily Bollinger Band.

The downward reversal from this resistance area will most likely form the daily Bearish Engulfing – if the price closes today near the current levels.

Given the strength of the resistance level 45000.00 and the overbought daily Stochastic, Dow Jones index can be expected to fall to the next support level 44235.00.