Trade Tensions Reignite: How Returning Tariff Risks Are Shaping Markets

Key Highlight

• Trade tensions between Trump and Europe resurface as tariff threats re-emerge

Market Recap

The US dollar recovered from earlier weakness after President Trump questioned Kevin Hassett’s potential appointment as Federal Reserve Chair. His comments helped calm investor fears that a more dovish leadership at the Fed could weaken the currency. Attention has since shifted to other possible candidates, including Kevin Warsh, Christopher Waller, and Rick Rieder, who are broadly seen as more market-friendly and less likely to pursue aggressive easing — though the final decision remains unclear.

Market Overview:

Markets have started the week cautiously after fresh trade-related headlines from President Trump reignited US–EU tensions, with threats of 10% tariffs on eight European countries backing Greenland, prompting the EU to consider retaliatory measures. In response, the EU is reportedly preparing tariffs on up to €93bn of US goods if the measures go ahead, with EU leaders set to hold an emergency meeting this week to discuss retaliation. Markets are in a risk off mood as a result with an early USD sell off fading.

Inflation data will be the key focus this week. In the US, delayed core PCE figures for October and November are expected to show inflation gradually easing toward 2.9%, supporting the view that the Federal Reserve can continue with a measured pace of policy easing despite solid consumer spending. In Canada, CPI is likely to edge higher to 2.4% YoY due to base effects, but sticky core inflation and a softer labour market suggest the Bank of Canada will remain on hold well into 2026.

In the UK, headline inflation is forecast to rise to around 3.4% YoY on Wednesday, largely driven by taxes and airfares, though underlying price pressures are still trending lower. Labour market data may be more influential, with further cooling in wage growth likely to tilt expectations towards a more dovish Bank of England.

Elsewhere, Japan’s headline inflation should cool, but underlying price pressures remain firm, making a Bank of Japan rate hike more likely in July rather than this month. In New Zealand, there is upside risk to Q4 inflation, which could keep the door open to additional rate hikes later this year.

19th January 2026

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