US Dollar (USD) bounced slightly on headlines that President Trump is considering a 10% tariff on China in retaliation for the flow of fentanyl on 1 February. Trump also said that ‘we are talking about a tariff of 10% on China based on the fact that they are sending fentanyl to Mexico and Canada’. DXY was last at 107.92 levels, OCBC’s FX analysts Frances Cheung and Christopher Wong note.

Risks skewed to the downside

“The threat of tariffs in consideration with a 1 Feb deadline instead of an immediate imposition of tariffs suggests that this is a strong urge for the parties to quickly return to the negotiating table to cut a deal. This also underscores the fluidity of tariff developments in a Trump regime. We reiterate our caution that the implications on markets can be very much 2-way, driven by headlines.”

“On one hand, tariff threats and eventual implementation of tariff is likely to weigh on sentiments and boost the USD. On the other hand, a longer delay on tariff announcement will continue to provide a breather for risk proxies while consensus trade (long USD) unwinds. For now, less drastic/ no immediate tariff plans are supportive of risk sentiments while taming USD bulls. As tariff concerns remain, it could still keep risk appetite restrained, implying that USD dips should still find support.”

Daily momentum is bearish while RSI fell. Risks skewed to the downside. Support at 107.80 (23.6% fibo retracement of Oct low to Jan high), 107.55 (50DMA). Bigger support lies at 106.40 (38.2% fibo). Resistance at 108.77 (21 DMA), 110.10 levels.