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.

Happy New Year!!

Sterling has made further ground back today after data showed that UK wage growth accelerated more-than-expected in October.

Average earnings including bonuses jumped up the highest levels in 5 months to 5.2% which smashed the markets estimates of 4.6%. This will provide the Bank of England with further rationale to deliver a slow and steady pace of interest rate cuts in 2025, which is Pound positive. No interest rate changes are expected at Thursday’s BoE interest meeting, although today’s data certainly increases the chances of a unanimous vote.

In other news, the last European Central Bank meeting of the year (last Thurs) delivered on what most of the market had expected: a 0.25% cut and a sombre downgrade of its expectations for Eurozone growth in 2025 and 2026. ECB President, Lagarde, hinted that things could be negatively impacted by Trump’s tariffs and it seems that they may look to cut at every meeting in the first half of next year. The Euro was largely unphased by this negative outlook as markets had seemingly already priced in a dovish message prior to the meeting.

Across the pond, market attention is now squarely focused on the last Fed meeting of the year (tomorrow evening). A 0.25% cut is almost universally expected, however the key will be the forward guidance on where policymakers believe rates will be going forward. With US growth remaining strong, the labour market continuing to add jobs at a solid pace and inflation remaining stubborn, it could be the case that these latest forecasts shift towards a more hawkish direction (i.e. an expected reduction in the number of interest rate cuts next year) but watch this space.

As a result, the GBP/EUR is up around 1-cent from yesterday’s low and back to last Thursday’s levels. The GBP/USD is up around 1-cent from last week’s low and trades at the highest levels since the release of Friday’s disappointing UK growth data. We have a packed schedule of data releases this week which includes US retail sales (today), UK/EU inflation data (tomorrow), Fed interest rate meeting (tomorrow), BoE rate decision (Thurs), US GDP (Thurs), and UK retail sales (Fri). So, please make us aware of any upcoming transactions you might have to execute before the festive break.

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UK wage data helps GBP recovery

Both the Euro and GBP have fallen today following disappointing business activity (PMI) figures out this morning from the Eurozone and UK.

Data showed that activity slumped across the board this month in the Euro Area, with the composite PMI index coming in well short of the estimate and to the lowest levels seen since January (48.1 vs. 50 estimate). Businesses across Europe seem to be acutely concerned about the risks posed by president-elect Trump’s radical tariff proposals. This could weigh particularly heavily on the common bloc’s economy in the next few years, given that it relies on US demand for around 4% of its GDP. Consequently, this data is likely to ramp up pressure on the ECB to deliver more aggressive interest rate cuts in the coming months to support the bloc’s economy. This could easily entail a jumbo 0.5% rate cut at next month’s ECB interest rate meeting. This is now roughly 60% priced in by markets, a repricing that has triggered a collapse in EUR/USD rate today.

Although not quite as dismal as the Euro Areas figures, the UK PMIs were underwhelming, to say the least. The composite index slumped into contraction this month (49.9) for the first time since October 2023, which was well below the estimate of economists (51.8). This is likely a direct consequence of the recent Autumn Budget announcement, with the large hikes to employer National Insurance contributions seen squeezing company profits, while triggering job losses and raising consumer prices. The data has led to Sterling weakness today as markets race to price in an additional rate cut from the Bank of England, which is now seen delivering three 0.25% cuts over the next twelve months (up from just two prior to this data).

As a result, the EUR/USD rate has fallen 1.4% from yesterday’s high and trades around a 2-year low. The GBP/USD is down around 1% from yesterday’s high and now trades around the lowest levels since May this year. The GBP/EUR has been trading within a very tight range around the market rate of 1.20.

Traders’ attention will now focus on this afternoon’s US PMI numbers, which take on added intrigue following the dire figures out of Europe this morning. Consensus is for a very strong print in the key services index around the 55 level, which would be consistent with strong expansion. Any number around this mark would ramp up expectations that a Trump presidency could mean a further divergence in economic performance across the Atlantic, which would only provide fresh fuel to the USD rally.

Factory

EUR and GBP tumble following weak PMI data

The USD has received a fresh bout of demand as a second Trump presidency continues to sink in with the market.

The expectations are that Trump will double down on his hardline tariff proposals and suggested expansionary policies. This may lead to higher inflation and therefore prevent the Federal Reserve from cutting rates more aggressively, which has made the dollar more attractive. Recent comments from Fed officials seem to support this notion and there is now more uncertainty over whether they will follow through with another 0.25% rate cut next month. This afternoon’s US inflation data (CPI – 1.30pm) will therefore be closely watched, as any surprise on the upside could dramatically change the odds on a December cut and consequently lead to further Dollar strength.

The Euro has continued to be on the backfoot since the US election news. Markets are concerned that Trump could target European trade following the threats he made during his campaign (e.g. tariffs of between 10-20% on any imports). Furthermore, news that the governing coalition in Germany has collapsed (with fresh elections in Feb) has added to the Euro’s woes. Talk of parity in the EUR/USD pair has now intensified, with a number of the big banks slashing their forecasts for the main exchange rate in the past few days.

In other news, Sterling performed poorly yesterday following a mixed UK jobs report. The UK unemployment rate jumped to above consensus to 4.3% last month (from 4%), its highest level since May. However, the data showed continued upside pressures in wages. Average earnings growth including bonuses accelerated again, rising to an annual pace of 4.3%, up from 3.9%. The latter should provide the Bank of England with little incentive to adopt anything more than a gradual easing cycle in the coming months, with the market only pricing in two additional 0.25% cuts in the next year.

As a result, the GBP/USD is trading around a 3mth low having lost nearly 2-cents this week. The EUR/USD is down around 3-cents since the US election and had touched the lowest levels since Nov 2023. The GBP/EUR has come off its most recent highs having fallen around 1-cent from Monday and trading around a 1-week low. Next up we the US inflation data out at 1.30pm today and UK growth data (GDP) on Friday morning.

Trump

Trump win continues to support the USD


The USD has rallied against almost every currency overnight as Donald Trump has won the US election with a big overperformance versus the polls.  

Expectations leading into the vote were that this was going to be one of the closest run races in living memory. However, as was the case in both 2016 and 2020, both the opinion surveys and prediction models once again grossly underestimated Republican support, with Trump not only achieving a big victory in the electoral college, but an outright win in the popular vote.

The dollar started to strengthen overnight as early results showed Trump was performing well in the key battleground states. This continued as Trump wins in key swing states started to be projected and later declared (North Carolina, Wisconsin, Pennsylvania and Georgia). Indeed, it now looks likely he will take victory in all seven key swing states.

Generally, markets are taking the view that another spell in the White House for Donald Trump is a bullish development for the USD. Some of key beliefs for this are as below:

1) Trump’s preference for lower US tax rates. Proposals for sweeping tax cuts under President Trump are seen as lifting near-term US growth, which may lead to higher inflation and therefore higher US interest rates (which makes the USD more attractive to investors seeking higher yields).

2) Greater protectionism means higher US tariffs, particularly on China and Europe. The implication here is that these tariffs could be a precursor to weaker global growth under Donald Trump. This is a scenario that would see investors potentially favour safe-haven assets, such as the USD.

3) Another Trump term may ensure higher geopolitical uncertainty, which is also not favourable for risk appetite. Support for Ukraine is not guaranteed, nor does Trump hold a particularly favourable view towards NATO.

As a result, the Euro was the worst performer against the USD among the major currencies, as investors brace for potentially onerous European tariffs and a heightened security risk. The EUR/USD has lost around 2-cents overnight and hit a 4-mth low. Sterling has proved to be more resilient against the USD, in part due to its lower exposure to global demand, but the GBP/USD is still down around 1.3% from the high it reached overnight and now trades at a 6-day low. The GBP/EUR is up 0.5% today and trading at a 1-week high.

So far, the moves in the FX market have been relatively contained versus many expectations. However, it’s very early days and we would expect volatility to remain elevated over the coming trading sessions, as investors position themselves in anticipation of another Trump presidency. This could potentially mean fresh downside in risk assets and another bout of USD strength, particularly should the Federal Reserve hint to markets at upcoming policy meetings (possibly even at tomorrow’s) that the outcome of the election may slow the pace of their interest rate cutting cycle.

In terms of actual US government policy change, we will have to wait until 20th January 2025 for Trump’s inauguration. However, Trump’s rhetoric in the meantime will be closely watched by market participants and any commentary that doubles down on his tariff threats and tax cuts may cause a further flight to safety (e.g. USD).

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USD rallies as Trump wins historic election

Sterling has lost ground in the last 24hrs as investors show a delayed reaction from Wednesday’s Autumn budget. 

New UK chancellor Rachel Reeve’s budget delivered massive extra spending plans totalling £70 billion each year. This will be funded by huge tax hikes (circa £40 billion per year, which is the largest in more than 30 years) and increases to borrowing by around £30 billion per year. While markets initially reacted in a relatively relaxed fashion to the budget, gilts (UK government bonds) later started to be sold-off and yields extended their rally yesterday amid widespread concerns over how this may ultimately weigh on UK growth. While the Labour party are claiming this new investment will spur UK growth and restore stability to the economy, markets are sceptical over whether this extra stimulus will be enough to offset the negative impact to household disposable incomes from the tax hikes and higher borrowing costs that are likely to ensue. 

In other news, the Euro has strengthened this week by some encouraging economic news out of the region. The latest EU growth report (GDP) showed their economy grew by 0.4% in the three months to September, which was double the 0.2% estimate. Data this week also showed that Eurozone inflation also rebounded off its 3-year lows in October. This has increased expectations that the ECB will take a less aggressive approach to interest rate cuts which has made the Euro more attractive. 

As a result, the Pound lost around 1% against both the EUR (mid-Sept low) and USD (mid-Aug low) yesterday but it’s since recovered around a third of this today. Focus today turns to this afternoon’s nonfarm payrolls report (1.30pm), but investors will have at least one eye on next week’s US election, which remains a tough one to call. Trump remains the front runner in the polls and prediction models, but his apparent advantage appears to have waned this week, and markets are back viewing the election as almost akin to a coin-toss.

DOwning street

Sterling falls following delayed reaction to budget

Sterling has weakened this morning after a surprise miss in the latest UK inflation report.

The CPI data showed that annual inflation dropped to a 3.5-year low of 1.7% last month versus expectations for 1.9%. Core inflation also eased to 3.2% (vs 3.4% estimate), which is the lowest level since September 2021. Not only should the data effectively guarantee another BoE rate cut in November (>90% priced in), but there is also now a heightened possibility that both the vote is unanimous and that the MPC strikes a more dovish tone in its communications. Market expectations are now around a 0.75% chance of back-to-back cuts in November and December.

Upon release of the data, the GBP/USD dropped nearly 0.75% and close to a 2-month low. The GBP/EUR fell just over 0.5% but continues to trade around buoyant levels. Next up, the market focus will shift to tomorrow’s European Central Bank interest rate meeting, US (Thurs) and UK (Fri) retail sales data, alongside a barrage of Fed policymaker speeches on Friday afternoon.

News

Dollar rallies as Trump launches trade war

Sterling tumbles following UK bond market sell-off

Happy New Year!!

UK wage data helps GBP recovery

EUR and GBP tumble following weak PMI data

Trump win continues to support the USD

USD rallies as Trump wins historic election

Sterling falls following delayed reaction to budget

Sterling drops as UK inflation decelerates

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