After several days of turbulence, selling pressure is easing across financial markets, suggesting that investors expect US president Donald Trump to adopt a less confrontational approach when meeting in person with his counterparts at the World Economic Forum in Davos later today. The dollar is steadying against its peers, Treasury yields are stabilising near recent highs, and equity futures are pointing to a modest advance when North American markets open.

Scarring will remain. For the second time in a year, markets have warned that the consequences of the president’s actions could weigh most heavily on the United States itself, not on its trading partners, and the dollar has reacted in ways inconsistent with its traditional safe-haven role. While yesterday’s pattern may not repeat in a full risk-off episode, the “dollar smile”—under which the currency strengthens on US outperformance, softens in calm periods and rallies during global stress—appears to have been truncated by rising institutional instability, again exposing flaws in a framework that has guided currency markets for decades.

Spillovers from Japanese markets are compounding the sense of fragility. After spiking to multi-decade highs in a self-reinforcing selloff when Prime Minister Sanae Takaichi promised more fiscal stimulus ahead of her election campaign, long-dated Japanese government bond yields are beginning to come back down, aided by supportive statements from a number of politicians and Ministry of Finance officials—but further consolidation could require a change in tack from the Bank of Japan or the government itself.

The British pound is trading almost unchanged even after inflation rose by more than expected last month, with economists pointing to narrow gains in categories like air fares and tobacco prices as skewing the headline print higher. According to the Office for National Statistics, all-items inflation climbed to 3.4 percent year over year in December, up from 3.2 percent in November, but the Bank of England’s preferred measure of core services prices held at 4 percent for a third month, suggesting that underlying inflation pressures are not accelerating. Most market participants still expect the fastest inflation rate among advanced economies to fall in the coming months, giving the Bank room to ease policy at least once before year end.

We expect mean reversion to play out across a number of financial metrics over the coming days, with term premia, implied volatility, index levels, and exchange rates moving closer to pre-weekend equilibria. However, with risks remaining elevated, a full reset to the complacent valuations that prevailed at the beginning of the year seems unlikely.

There are no first-tier economic data releases scheduled in the US or Canada today, but traders will have plenty to chew on. Although it now seems unlikely that a Supreme Court decision on the Trump administration’s tariff regime will land before late February (after a four-week recess), oral arguments over the president’s attempt to dismiss Federal Reserve Governor Lisa Cook might move markets, given that the case could open—or close—the door to a broader attack on the central bank’s independence.

Headlines from Davos will almost certainly generate volatility, with the Canadian dollar particularly exposed to Trumpian blowback related to prime minister Mark Carney’s speech yesterday, in which he said the “old order is not coming back” and urged middle powers to act together “because if we’re not at the table, we’re on the menu,” affirming the country’s support for Greenland, Denmark, and the North Atlantic Treaty Organisation against what he described as “economic coercion” from stronger powers. The remarks came after Canada and China agreed to cut tariffs on electric vehicles and agricultural products on Friday—a deal that initially drew little reaction from President Trump but could now invite a response.