The latest CPI annual growth rate in the U.S. has risen to 3%, while the core CPI has also increased to 3.2%. Amid the inflation recovery environment, coupled with planned increases in tariffs, the Chairman of the Federal Reserve stated that it is difficult to lower interest rates in the near term. However, the dollar has not been able to reach new highs. Will the euro, yen, and pound continue their rebound? How should we respond? Let me summarize my conclusion: since the market has largely absorbed the information that interest rates are unlikely to be lowered in the short term, the focus may shift to the disruption of the economy caused by inflation and tariffs. The euro could be affected by varying interest rate cut magnitudes, while the yen is supported by central bank rate hike-related statements. Thus, investors should be ready for hedging.

Tariffs are a double-edged sword; high inflation reigniting rate hike expectations will support the dollar. After the new administration's emphasis on using tariffs to reduce trade deficits and encourage energy extraction to mitigate inflation, coupled with public panic buying and rising service sector costs, the distance from the Fed's 2% target range is increasing. Consequently, the next interest rate cut has been postponed until the second half of 2025. However, many investors find it perplexing why the dollar's exchange rate hasn't risen. The reason lies in the market having largely digested the information that there will be no interest rate cuts in the interim, instead turning their attention to the impact of tariffs on the import industry and whether inflation poses risks to consumer spending. If companies are not optimistic enough to ramp up investments while consumers must boost consumption, the pressure for economic recession will begin to rise. We can observe changes in this phenomenon from the GDP composition of Q4 2024, with a GDP annual growth rate of 2.5%, a 3.2% increase in private consumption, but capital expenditure is only at 1.7%, the lowest since Q2 2023, indicating an early sign.

From the first figure, we can see that the five-year inflation expectations in the U.S. surged to 2.66% on February 12, reaching near two-year highs, breaking through the previous two peaks, and not far from the 2.71% from March 2023. This rapid climb from the low of 1.86% in September 2024 indicates that the market is quite concerned about future inflation expectations.

If merely delaying interest rate cuts isn't enough to support the dollar's exchange rate, consider that in March 2023, the Federal Reserve was steadily raising rates. Perhaps only increasing inflation alone is not sufficient to prompt the Fed to pivot, but if subsequent equal tariffs have a huge impact, driving the five-year inflation expectations to break through 2.71% nearing 2.8%, discussions of rate hikes might re-emerge, potentially providing further support for the dollar.

The EU faces significant tariff pressures, and the trend of supporting economic policies through rate cuts remains unchanged. Given that the EU enjoys a large trade surplus with the U.S., former President Trump had previously signaled actions to impose tariffs, with reciprocal tariffs set to debut in April. If further discussions do not go smoothly, there is a possibility of following the Canadian or Mexican models, and to minimize impact on the economy, the euro may continue to depreciate or follow a route of rate cuts to support the economy. From the second figure, we can observe that the euro futures on the CME have recently shown a weak oscillation pattern, falling from a peak of 1.02045 on January 13 from a high on September 25. However, since Trump took office, they have not broken through the bottom, indicating that tariffs have had a notable impact on eurozone countries, yet investor confidence has not evaporated. Therefore, for investors with relevant investment or hedging needs, such as those who believe the euro has room for upward movement or hold significant euro positions, euro futures can be used for short-term high liquidity operations.

Japan has committed to increasing its purchases of American natural gas and investment scale and is relatively less affected by tariffs compared to China, which has already faced increased tariffs. By increasing its natural gas purchases and investments in the U.S., Japan aims to gain Trump's approval and potentially reduce its trade deficit issues, while also expanding American companies' sales channels post-production, thereby hopes to avoid the risk of being taxed by the U.S., allowing the yen's appreciation or depreciation to be managed by Japan's central bank. Recently, a member of the Bank of Japan expressed hopes for a rate increase to at least 1% within the fiscal year 2025. If more economic data supports rate hikes subsequently, this could indeed become a topic supporting the yen's exchange rate, providing better opportunities to profit from short-term fluctuations in yen-related time deposits via CME's yen futures instead of relying on lower interest rates.

The pound has fallen sharply but is rebounding, and the likelihood of a significant rate cut is low. Compared to the significant tariff pressures faced by the EU, the UK has not yet been targeted by Trump, and therefore has not yet experienced a significant impact in the short term. Additionally, stable economic performance in the UK has supported the exchange rate, and if the pound is projected to lead gains among European currencies, it can also be capitalized on via CME's pound futures.

As Trump's presidency approaches one month, financial markets have experienced significant shocks. Investors are advised to prepare risk management strategies before investing, which can enhance long-term profit opportunities.