Markets were relatively calm last week - until late on Friday, when President Trump launched a series of personal attacks against Federal Reserve Chair Jerome Powell.

On his social media feed, Trump labelled Powell “a major loser” for not lowering interest rates, criticising him for being too slow to act in support of the US economy. This has raised concerns that Trump might attempt to remove Powell from his position. While the legal grounds for such a move remain unclear - and Powell himself has stated that he does not believe the President has that authority - the mere suggestion has unsettled investors. Since markets reopened on Sunday night, we’ve seen a broad sell-off in US stocks, bonds, and the USD.

Generally, market sentiment remains dominated by the unpredictability of the White House, pushing economic data into the background. However, tomorrow’s PMI reports will offer a valuable first look at how much damage Trump’s erratic policy approach has done to business confidence. Recent sentiment surveys have consistently painted a uniformly bleak picture, with both consumers and manufacturers fearing rising prices/costs from tariffs. Manufacturers, in particular, are holding back on investment - an ironic twist, given this is the very sector Trump aims to support.

Since “Liberation Day”, the Euro has emerged as one of the best-performing major currencies which suggests that Eurozone markets are receiving a significant part of the capital that is fleeing the US. Notably, the Euro continued to strengthen even after last week’s relatively dovish ECB meeting - underscoring investors’ growing preference for the Eurozone’s institutional stability over the US's policy turmoil.

As a result, the GBP/USD rose around 2% higher from last week’s low and has traded towards the highest levels in 3-years (to around where it briefly spiked last September). The EUR/USD climbed to nearly 2.4% above last week’s low and to a 3.5yr high. Meanwhile, GBP/EUR has remained within a relatively tight range over the past week, currently trading about 1% above its recent lows.

Trump's Fed attacks fuel 'Sell America' trade narrative

In a dramatic turn, last night President Trump announced he was postponing (reciprocal) tariffs above 10% for most countries by 90-days – except for China, where total tariffs were raised to 125% from 104%! Markets rallied overnight and into this morning on hopes that this delay signals room for negotiation and eventual de-escalation of the situation, which will hopefully limit the global economic fallout.

While there are no guarantees when Trump is involved, it seems unlikely that such extreme tariffs will remain in place, especially given the growing recession risks they pose. Trump’s change of heart is likely in response to the sharp sell-off in equities, the bond market rout and intense pressure from Republicans and resultant pressure from business leaders – a self-inflicted recession isn’t particularly the legacy the 47th President wants.

Equity markets have led the gains, with US equity indices posting double digit gains last night (e.g. Nasdaq up over 12% which is the second largest on record) and Asian/European stocks rallying this morning. Safe havens like the Japanese Yen and Swiss Franc have also fallen. The Chinese yuan, however, remains at 18-year lows and tensions with China appear harder to resolve.

Uncertainty remains very high and the fact that key policy decisions are seemingly being made almost entirely off the cuff (Trump’s top trade official was reportedly unaware of the delay until after announcement) is a bit unnerving. Again, there are no guarantees here (a delay is still just a delay and not a cancellation), but the fact that Trump appears open to negotiation suggests the previous sky-high average US tariffs will likely come back to more realistic/sustainable levels, which is coming as a relief to markets.

As a result, the GBP/USD has recovered over 1.2% from Monday’s low and the GBP/EUR bounced around 1.2% higher from yesterday’s low. The EUR/USD remains very choppy and continuing to see-saw around the 1.10 mark. Today, we see the release of the latest US inflation figures and tomorrow we have UK GDP data. Both are likely to be very overshadowed by the more recent developments and more time will be needed to see the real impact of tariffs on inflation/growth.

Tariffs

Stock markets rally as Trump announces 90-day delay to reciprocal tariffs

President Trump’s tariffs have continued to wreak havoc in financial markets. Major stock indices continued to tumble into this week as investors concerns grow over a slowdown in the global economy (albeit we’ve seen a bit of a rebound so far today).

The perceived ‘safe haven’ currencies (e.g. the Japanese Yen and Swiss Franc) have been in heavy demand due to the high levels of uncertainty. Furthermore, after the initial large selloff in the USD last Thursday, the US currency has since rallied back as the sharp selloff in stock markets and risk assets boosted the safe haven appeal of the Dollar.

Yesterday, China announced proposed counter tariffs of 34% and vowed to “fight to the end”, despite Trump’s warning of another 50% tariff should they not withdraw this countermeasure. The EU has taken a less aggressive approach and appears open to negotiation, while also floating the idea of potential 25% tariffs on some US goods. Interestingly, the Euro has so far been quite resilient to the tariff news even though their economy is heavily exposed to these import taxes which currently stand at 20%. Some analysts are arguing this is because the Euro is emerging as a de facto safe haven given the currency’s high liquidity and the bloc’s solid current account surplus.

Surprisingly, Sterling has been among the worst performing major currencies (particularly against the Euro). We would expect the UK to be relatively isolated from the tariffs given its low exposure to global demand (particularly the US and China) and the fact they’ve been set at the lowest level of just 10%. However, investors appear to be punishing the Pound due to its high-risk status and elevated interest rates, which would allow some room for aggressive rate cuts if the Bank of England ever pressed the panic button on the growth outlook.

As a result, the GBP/USD has fallen nearly 5-cents from last Thursday’s high and now trades around a 1-mth low. The GBP/EUR has fallen 3.5-cents since the tariffs announcement and trades around the lowest levels since August. The EUR/USD has swung wildly and is currently trading 2-cents down from last Thursday’s high and around a cent higher from pre-tariff announcement levels.

Markets are extremely sensitive to any tariff news and currencies will likely remain very volatile as further headlines come in on any retaliatory measures and the state of negotiations.   

trump tariff

Markets extremely volatile as fallout continues from Trump's tariffs

Markets have been very volatile overnight following the announcement of sweeping new tariffs from President Trump.

He announced a universal 10% tariff on all imported good into the US (starting 5th Apr), along with higher "reciprocal" tariffs on about 60 countries (starting 9th Apr), which includes key allies and major trade partners. Some of the notable tariffs include:

- China: 34% (which is on top of existing duties and takes their total tariffs to 54%!)
- European Union: 20%.
- Japan: 24%.

Markets had been bracing themselves for this announcement and they were steeper than many expected (particularly for China). There are now large concerns that this will lead to trade wars and that it risks sending the global economy into a negative spiral. Furthermore, although Trump’s tariffs are designed to hurt other countries, there is heightening fears that this will hit the US economy and potentially take them into a recession. In turn this would make the Fed more likely to cut interest rates. At the same time, these tariffs risk pushing up US inflation and therefore potentially creating a stagflation environment (e.g. weak growth and high inflation) which would be a very challenging situation for the Fed to navigate.

Consequently, this has led to a sharp selloff in the USD overnight and into this morning. The GBP/USD has travelled nearly 2.5 cents higher since yesterday and now trades at a 6-month high (and still looks like it has some steam left). The EUR/USD has risen over 2 cents from yesterday and now also trades close to a 6-month high (and testing the market rate of 1.10). The GBP/EUR continues to trade within the familiar ranges we’ve seen over the past week or so.

Uncertainty is still very much up in the air, and likely to remain high, as the market await the responses from other countries/regions (in particular Europe and China). Some US lawmakers have suggested that these are the highest the tariffs will be and then the expectations are that they will eventually get negotiated lower. However, no one is sure how long that would take to happen and therefore how much impact will ultimately be felt in the global economy before things can eventually reach a new equilibrium.


US Tariffs

Markets and USD rattled following Trump tariff announcements

The USD has heavily weakened this week, as concerns over the state of the US economy outweighed any fears over the global growth implications of Trump’s confirmed trade tariffs.

Ordinarily, the enforcement of Trump’s trade levies should be propping up the dollar, but market participants appear to be focusing more on the impact of these restrictions on the US economy than the global one. Markets are now bracing for a possible contraction in activity in the first quarter after a key US GDP indicator fell into negative territory late-last week - partly a consequence of the Republican DOGE efforts intended to reduce waste in the US government. Investors are now betting that the Fed will need to cut rates more aggressively this year (around 3 cuts now being priced in for this year) to help stimulate the economy, which has made the USD less attractive.

The relatively restrained retaliatory responses from China and Canada so far may also provide another reason why the USD hasn’t been bought back following the confirmation of these trade tariffs. Authorities there appear keen to avoid an escalation in the tit for tat tariffs that would trigger a full-blown trade war. This may keep alive the possibility for some fresh negotiations and, consequently, a potential dilution of these tariffs later down the line.

As a result, the GBP/USD has risen nearly 3-cents this week and currently trades around the highest levels since mid-November. The EUR/USD has moved over 3-cents higher this week and also trades close to a 4-month high. The GBP/EUR is down around 1% this week – sitting at a 2-week low – as traders buy more heavily into the Euro than Sterling.  The next bits of data are this afternoon’s US PMI figures and Friday’s EU GDP data and key US payrolls report.

Trade

USD weakens as investors reassess impact of Trump's tariffs

The USD rallied yesterday following fresh tariff headlines from the Trump administration.

The US president unveiled fresh tariffs for China, with an additional 10% tariff announced on Chinese imports on top of the 10% already imposed at the start of the month. Markets were also surprised after he said his proposed import taxes for Canada and Mexico would go ahead as planned next week. Moreover, Trump warned (again) that EU tariffs are imminent but, so far, his posturing has not amounted to any concrete action.

Despite these announcements, the moves have been relatively contained thus far which is probably due to hope that eleventh hour deals will be reached to avoid the implementation of these economically damaging trade restrictions. Let’s not forget that investors have also been burnt before and have perhaps learnt not to overreact too much to Trump’s remarks, which in the past have turned out to be largely bluster and little action.

Sterling has been performing particularly well against the Euro given the UK’s apparent isolation from US tariffs and rising hopes of a US-UK trade deal following a positive meeting between Trump and Starmer yesterday. As a result, the GBP/EUR now trades around a 2-month high and only around half a cent from the highest levels since the 2016 (i.e. year of Brexit vote!). The GBP/USD rate has fallen around 1-cent in the last 24hrs and currently trades around an 8-day low. The EUR/USD has lost around 1-cent from yesterday’s high and trades around a 2-week low.

Tariff

Dollar jumps as Trump pushes on with tariff agenda

The USD has rallied sharply this morning after the Trump administration unveiled details of its tariff proposals over the weekend.

The import duties announced are set at the below levels for the following countries and will take effect tomorrow:

Canada: 25% on all imports (10% on energy) 
Mexico: 25% on all imports
China: 10% on all imports

Trump has also said that tariffs on the EU ‘will definitely happen’ and market commentators are expecting to hear more news on this relatively soon. When asked about the UK, he said the UK was ‘out of line’, but implied that a deal can be struck to avoid tariffs.

As a result, the Euro is among the worst performers in the G10 this morning and the EUR/USD is down nearly 2% from Friday. Sterling losses have so far been relatively contained due to the UK’s lack of reliance on external demand and hopes of US-UK trade deal. However, the Dollar’s strength has still pulled the GBP/USD down 1.5 cents and close to a 2-week low. The GBP/EUR has risen nearly 0.75% from Friday and trades at the highest levels for 3.5 weeks.

We have some important market events this week, including BoE rate decision (Thurs) and US non-farm payroll data (Fri). However, it’s likely news flows on Trump’s tariff agenda will dominate market movements this week. Even after the recent sell off, most currencies still trade at levels that imply markets are expecting draconian tariff levels to be short lived.

US flag

Dollar rallies as Trump launches trade war

Sterling has lost a lot of ground in the past 24hrs following a large sell-off in the UK bonds market. 

The yield on 10-year gilts  (i.e. % interest investors required to buy government bonds) rose to the highest levels in over 16 years (Aug 2008) and 30-year gilt yield to the highest since 1998! Although this move in bond markets is a global one, with US treasury yields driving a lot of this move, it appears the market are hitting the UK bonds harder due to ongoing concerns over the latest Labour budget with concerns it may lead to stagflation (i.e. weak growth and sticky inflation). This rise in bond yields (i.e. borrowing costs) may ultimately lead the BoE to have to keep rates higher for longer to control inflation and growth being hit. 

Sterling has also been suffering from increased risk aversion in the market. Yesterday, CNN reported that Trump is contemplating declaring a national economic emergency to enable him to push through his new import tariff program. This would likely lead to a slowdown in global growth and likely heavily stoke US inflation levels.

As a result, the GBP/USD has fallen 3-cents this week and trades at a 14-mth low (Nov ’23). The GBP/EUR has fallen around 1.2% from yesterday morning and now trades around a 2-mth low. The EUR/USD trades around the lowest levels since November ’22. 

Sterling

Sterling tumbles following UK bond market sell-off

We hope you had an enjoyable break and wish you a happy and healthy 2025.

The FX market was relatively quiet over the festive period. However, the US dollar started the new year on a solid footing – continuing its trajectory from the end of 2024. Strong US economic data, together with the prospect of an ever-rising fiscal deficit and uncertainty surrounding Trump’s tariffs, has continued to encourage investor flows into the safe-haven dollar (and US assets generally). On the opening trading day of 2025, the GBP/USD rate briefly pushed down to the lowest levels since April ’24 (and below 1.24). It’s since recovered around 1% and now trades around the levels just prior to the Christmas break. Markets will be closely watching Friday’s key US jobs figures to provide further clues on the direction of the USD.

The dovish tilt in the Bank of England’s December communications, which unexpectedly had three policymakers voting in favour of an immediate interest rate cut, has created some short-term vulnerability for the Pound. However, markets appear to still be taking the view that any policy cuts in 2025 will be gradual and this has allowed Sterling to hold its own against most major currencies. Underlying this support is the increased expectations of better relations with the EU under the Labour government, a relatively robust macroeconomic performance and a still very attractive valuation for GBP (historically speaking). There’s limited UK data releases out this week, but things ramp up next week with UK inflation, growth (GDP), and retail sales figures.

The Euro has remained under pressure as the gap between market interest rates expectations between the ECB and the Fed rate remains wide. This pushed the EUR/USD to the lowest levels since November 2022 on the opening trading day of the year (into 1.02s). Tomorrow’s latest Eurozone inflation report will be key to gauge the extent to which the ECB can realise the market's generous expectations for cuts during 2025. Another 0.25% rate cut appears effectively set in stone for the central bank’s January meeting, although investors will be far more interested in any comments from President Lagarde that could provide clues as to where the rate cuts may bottom out.

News

Trump's Fed attacks fuel 'Sell America' trade narrative

Stock markets rally as Trump announces 90-day delay to reciprocal tariffs

Markets extremely volatile as fallout continues from Trump's tariffs

Markets and USD rattled following Trump tariff announcements

USD weakens as investors reassess impact of Trump's tariffs

Dollar jumps as Trump pushes on with tariff agenda

Dollar rallies as Trump launches trade war

Sterling tumbles following UK bond market sell-off

Happy New Year!!

Links

Social

Contact

Social