06:09 AM EST, 02/04/2025 (MT Newswires) -- Amid the United States-Canada-Mexico tariff saga -- which was the main driver of EUR/USD on Monday -- eurozone flash CPI estimates for January came in slightly hotter than expected, said ING.

The core measure was unchanged at 2.7% year-over-year while expectations were for 2.6%.

The upside risks remain significant to inflation, but ING is still confident that the trajectory remains deflationary for the remainder of the year and still predicts rates will be cut at least to 2.0% in the eurozone.

In light of U.S. President Donald Trump's handling of the Mexico and Canada tariff threat, sentiment in the eurozone has improved that a deal can be struck and protectionism averted, wrote the bank in a note. Still, extra caution is warranted.

Part of Trump's motive in delaying tariffs on U.S. neighbors was domestic backlash for potential immediate economic pain for U.S. consumers and that isn't necessarily true for European Union tariffs. On those, Trump can afford to play the longer game and make the EU feel some "pain" before striking a deal, ING said. Trump's motives for tariffs on the EU would not be border-related, where a deal is arguably quicker to achieve as seen on Monday, but rather on trade imbalances, which often require longer negotiations.

With all this in mind, ING is somewhat skeptical that the euro is bound for a major rally. Trump has already hinted the EU is next on the tariff list, and markets may probably find better value in buying the dips in currencies that have passed the protectionism peak against the euro, which is still to face the worst of it. ING expects a U.S.-China trade deal to take EUR/USD close to 1.040, but the rally may lose steam around those levels.

Sterling emerged as a safe haven among pro-cyclical currencies on Monday and seems to be retaining some solid footing after a U.S. trade war was averted, stated ING. The reason is simple: the United Kingdom doesn't have much to lose from U.S. tariffs. U.K. exports to the U.S. are less than 2% of gross domestic product and those to China less than 1%.

Incidentally, Trump seems in no rush to hit the U.K. with tariffs, also considering its goods trade balance with the U.S. is arguably negligible. Trump also seemed to be on rather amicable terms with U.K. Prime Minister Keir Starmer after a recent call, added the bank.

Another factor contributing to sterling strength was Starmer's trip to Brussels. That was officially aimed at strengthening an EU-U.K. defense path, but on which markets may be double reading an intent by Starmer to gradually reconnect with the EU politically. That is inarguably positive for sterling, which remains highly sensitive to any development that can improve a worsening growth outlook, according to ING.

There are however some downside risks for sterling this week, ING foresees headlines Tuesday confirming the fiscal headroom for the U.K. finance minister has evaporated due to higher borrowing costs, and on Thursday the Bank of England may deliver a dovish rate cut.

Still, EUR/GBP may not return to the 0.8450 January peak soon.