ACM Update 14-04-25
Once again, Donald Trump and his see-sawing tariffs continued to drive currency markets last week. The President paused his initial plans once more, but fears of an all-out trade war between the US & China only escalated. The Dollar was sold off whilst other safe haven currencies rocketed.
The Pound continues to bear the brunt of the impact, slumping to a 17-month low versus the Euro. Not even buoyant GDP data helped. The Euro meanwhile continues to be a beneficiary of the recent shift away from the Dollar.
A shorter four-day week before the Easter break sees UK unemployment and inflation releases, followed by the latest ECB interest rate announcement on Thursday lunchtime. We can also probably expect more volatility courtesy of The White House lectern.
According to a colleague, the market update from last week featured the word tariff a total of fifteen times! With two on the board already this week, we may well reach a similar number again. After all, these are the main global news talking point at present, let alone the major (and sometimes sole) driver of currency markets.
Donald Trump continued his back-and-forth global tariff battle last week, to the point it was hard to keep up. We are currently living in an age where good news can be taken away in a tweet, and a good day can be wiped out just as easily. The Dollar continues to see weekly movements of 3% plus versus some majors and moves of up to 10% since the start of the month versus others. Stock markets continued to yo-yo.
Tariffs implemented the previous week were reversed back down to 10%, except for against those who “retaliated” in the interim. This saw China facing tariffs of 125% on some items, but Trump has since provided smartphones and computers with an exemption.
The White House suggested that the overall reversal was in fact a premeditated move to get more favourable trade deals, but Trump admitted himself it was a reaction to the market turmoil, especially in bond markets. Trump is seemingly trying to steal former UK PM Liz Truss’s title of who can crash the bond market the quickest.
The usual economic data fell by the wayside somewhat, but did still cause some degree of market movement. The latest Federal Reserve meeting minutes painted an incredibly nervous picture emerging. The committee sees risks of both higher inflation and slower growth as a direct consequence of the tariffs. Further speeches from individual policymakers during the week echoed the same.
US inflation for now is showing positive signs. The latest release for March (pre-tariffs) showed a movement from 2.8% down to 2.4%, which was a bigger drop than expected. An expected fall in energy prices was the main contributory factor. Some called this drop the calm before the storm. Others have suggested that tariffs create a supply side shock, but if that were to then begin a demand shock, this could easily be disinflationary. At present, it is tough to know.
What is clear at the moment though is that American consumer surveys are looking bleak. One last week suggested the public expect inflation to hit over 6.5% in the next 12 months, whilst another saw consumer confidence drop to its lowest since the summer of 2022, when inflation was through the roof.
For now, what we can say is the Dollar path remains uncertain, essentially at the mercy of Trump. The Federal Reserve are poised and if the unemployment market suffers and growth slows, they may be forced to take action.
The Dollar weakened considerably last week, losing over 3.5% to GBP as shown below.
In these uncertain times, safe haven currencies such as the Swiss Franc and Japanese Yen have been the big beneficiaries, seeing considerable strength. On the other side of that coin though is the Pound, which has taken somewhat of a battering of late, slipping to 17-month low versus the Euro for example. Investors have rushed from the Pound into safe havens such as the CHF & JPY.
Markets also now expect more Bank of England rate cuts to come this year, another contributory factor in the GBP demise. A US slowdown is projected to spill over into UK markets, meaning the already fragile UK Government’s finances could suffer further.
Aside from all of the GBP weakness due to the above, the UK economy managed to post some (comparatively) impressive growth figures in February. The data released last week demonstrated the biggest uptick in almost a year, hitting 0.5% month on month growth. The figure was considerably better than the 0.1% which markets predicted. Cue the usual remarks from Rachel Reeves who described the uptick as “an encouraging sign” but the Government are “not complacent”.
Some of this shift was widely attributed though to businesses rushing orders through prior to the latest round of tariffs being imposed. Figures supported this logic, showing exports to the US increased by £500m in the month, and hit their highest since November 2022.
Aside from the external factors already mentioned, the other UK event was a speech from Bank of England policymaker Clare Lombardelli. The UK rate-setter expects US tariffs to be detrimental for UK economic growth, whilst also saying it is too early to judge what the UK inflationary impact would be.
The Euro continues to benefit from investor flows away from the US. This is one of the main reasons it was so strong against GBP, the US Dollar and a raft of other currencies last week. The reallocation of US assets has really been supporting the single currency of late, meaning we saw a high of over three years on EUR-USD last week.
There has been a marked recent fiscal shift via the changes in the German economic situation. This was further supported last week as a Conservative-Social Democrat governing deal was reached by Friedrich Merz, forming a “strong government capable of action”. The incoming leader also stressed that this was a key message to Donald Trump that the country is back on track, following its recession woes in recent years. Inflation in the country continues to ease.
Aside from all of the recent strength, economists are still projecting the ECB to cut interest rates twice more this year, before reaching their neutral rate. Growth remains a concern, definitely not helped by Trump’s actions. The next ECB meeting arrives this week, followed by another in early June. Both meetings are expected to deliver the aforementioned 25 basis point cuts.
The slump in GBP-EUR rates last week can be seen in the chart below:
The week ahead:
Monday – ECOFIN Meetings, Fed Waller speech (18:00 UK time)
Tuesday – UK Unemployment (07:00), German ZEW Economic Sentiment (10:00), Canada CPI inflation (13:30)
Wednesday – UK CPI inflation (07:00), EU Final CPI inflation (10:00), US Retail Sales (13:30), Bank of Canada Rate Announcement (14:45), Fed Powell speech (18:30)
Thursday – ECB Rate Announcement (13:15) & Press Conference (13:45)
Friday – UK PUBLIC HOLIDAY – Good Friday
A brief reminder that this week and next are both short weeks, with the Easter Bank Holiday weekend in the UK from Friday to Monday. The Aston offices will be closed on both days as a result.
Aside from the above, the ongoing Trump tariff talk will remain the major driver of financial markets. The President had the first annual physical of his second term last week, where he was confirmed as in “excellent cognitive and physical health”. I am sure many around the world at the moment might well question the former….
With a short week and very little of note released today, market activity is sandwiched into the middle three days. UK data has plenty of interest, with the latest unemployment and inflation releases coming on Tuesday and Wednesday morning’s respectively. The latter will be of importance and is expected to dip to 2.7%, but again these figures are from March and pre-tariff changes.
The US also has a few releases, with the Retail Sales data and a speech from Jerome Powell the most relevant. It will be interesting to hear the Fed Chairman’s latest thoughts on the current market conditions. Naturally though, Trump activity will remain as the main driver, especially as trade tensions with China remain at an elevated level.
The latest European Central Bank interest rate meeting takes place this Thursday, sneaking in just before the Easter weekend. It seems almost a certainty that another interest rate cut will happen on the continent, but the comments in Christine Lagarde’s press conference afterwards will be of greater importance.
We can expect the comments of Trump, Powell & Lagarde to be the big talking points this week. We expect to remain in a period of extreme volatility for now. Movements of up to 2% per day seem very much the norm, but can be reversed very quickly too.
With such major movements, it is imperative that your Aston contacts are aware of any pending requirements. Protecting your FX exposure with tools such as forward contracts, is a sensible risk-based approach at present. Reach out to the team for more information.
Have a great week.
