BUZZ-COMMENT-Tariff risks remain the key driver for FX

Jan 30 (Reuters) - Both the Fed and ECB policy decisions were uneventful, which underpins the view that expected updates to U.S. trade policy are the main driver for FX markets.

Approaching the Feb. 1 tariff deadline, traders continue to ponder whether the Trump administration will deliver on recent threats and as a result, the dollar and, more notably, the yen, remains bid.

However, it was noteworthy, that President Donald Trump’s, Commerce nominee, Howard Lutnick, appeared to leave the door ajar for both Canada and Mexico avoiding tariffs should they act swiftly to stop allowing fentanyl and illegal immigrants into the U.S. Meanwhile, the Mexican President said she does not think the U.S. will impose tariffs this weekend.

Should the deadline pass with no tariffs imposed, FX markets are likely to see a bout of relief, which would weigh on the dollar in the short-run as conviction to hold longs dwindles.

There is also a question of whether tariffs announced would not be imposed immediately and instead kick off a period for negotiations that might allow time for both Canada and Mexico to ultimately avoid duties being imposed. In this scenario, the announcement effect would likely prompt a knee-jerk move higher in USD/CAD and USD/MXN though perhaps not a sustained rise.

For now, the focus is on Trump’s self-imposed Feb. 1 tariff deadline, which should keep FX pairs in ranges until then.

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