Foreign Exchange Analysis ~ 08 April 2025

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GB Pound

What happened last week?

Sterling, along with almost all other currencies, traded almost entirely in response to the US tariff announcements last week. Because the tariff formulas is essentially derived from a the US's trade deficit with each nation, the UK did came off significantly better than its European and Asian counterparts. The currency response to the announcement was a broad depreciation of the dollar against all currencies, with GBPUSD briefly touching 1.318, a level not seen since October 2024.

Interestingly, while one might expect the currencies of nations hit by harsher tariffs to perform the worst, GBPEUR actually depreciated on the back of the announcement. This was predominantly driven by a narrower interest rate differential due to the lower rate outlook in the UK following the announcement.

What to watch for in the short-term?

Despite GDP on Friday (which is unlikely to drive GBP materially), we are expecting UK bonds, equities and sterling to continue trading responsive to US news headlines.

What about the coming months?

With c.79bp of rate cuts expected before the end of the year, the GBPUSD interest rate differential is now expected to be 30bp for December maturities due to the large drop in US rate expectations. US inflation over the next few months will be key to see if this differential changes.

Calendar

Friday 7am | GDP

US Dollar

What happened last week?

In the first 10 minutes of Trumps highly anticipated liberation day speech, the markets responded surprisingly well, interpreting the flat 10% reciprocal tariff with a sigh of relief - equities rallied and the dollar stayed strong. Markets soon gyrated as the ominous whiteboard entered the screen, uncovering a list of trade deficit based tariffs on countries around the world. The aftermath caused a freefall across most tradeable assets - $8.3tn wiped off global equities with the SnP500 posting the largest single day decline since 2020. Away from equities, the market cut growth expectations and priced c.110bp of rate cuts in 2025. Similarly, Oil tumbled and the DXY depreciated.

What to watch for in the short-term?

More recently, starting this week, Mondays session saw some green on the screen following Fridays sea of red. Nevertheless markets remain under pressure, and FX traders are waiting to see if Trump will back down on some countries and focus protectionism on China.

What about the coming months?

One scenario some traders are betting on is the Fed being forced to cut rates, pushing the dollar lower. However on the other side of the bet, some participants are seeing a scenario where tax deductions and deregulation come into effect, benefitting the American economy and consumers absorbing the price rises, causing the dollar to rally in H2 - without any directional assumptions we definitely see currency markets entering a period of higher volatility..

Calendar

Thursday 12.30pm | CPI

Euro

What happened last week?

Before touching on the post tariff move on Wednesday evening, Europe released it's latest inflation data for March on Tuesday. The headline inflation came in line with expectations and slightly lower than the previous month (2.2%) with core inflation dropping lower than expected at 2.4%.

The 20% tariff placed on Europe sent shockwaves to the major European equity indexes during Thursday and Friday's sessions with a slight recovery this week. Although European exporters have been hurt by the tariff announcement, the single currency has benefitted as the worlds second most liquid currency. If the market dislocation continues, traders may chose to flee to the euro for liquidity (albeit 1/3rd of the liquidity of the dollar).

What to watch for in the short-term?

Europe has been slower to retaliate than China, markets watch keenly to see how they respond - if a harsh response is taken, a trade war could ensue with a magnitude large enough to cripple the global economy (although this is a worst case scenario).

What about the coming months?

If Trump does indeed decide to focus efforts on China, Europe could escape unscathed. This would be a dollar and euro positive..

Calendar

Friday 6:00am | German HICP Data

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