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The threat of a transatlantic trade war has lifted as quickly as it arrived. President Trump confirmed late yesterday that he is withdrawing the threatened 10% tariff on European and UK goods, averting what markets feared would be a damaging economic clash. The abrupt U-turn follows what the President described as a “productive” meeting with NATO Secretary General Mark Rutte, where a “framework” for the Greenland dispute was reportedly agreed.
Investors have wasted no time in pricing out the risk of conflict. Global equity markets are enjoying a spirited relief rally this morning, with the FTSE 100 and major European bourses tracking a sharp recovery on Wall Street. The “panic premium” that had built up in safe-haven assets earlier in the week is evaporating, allowing risk-sensitive currencies to claw back lost ground.
For the UK, the timing is particularly significant. The removal of the trade threat comes just a day after domestic data showed inflation ticking up to 3.4%, a surprise that has forced markets to rethink the Bank of England’s rate path. With the external risk of tariffs now sidelined, the focus has snapped back to these sticky internal price pressures, which suggest interest rates may need to stay higher for longer.
On the continent, the mood is one of palpable relief but lingering caution. While the Eurozone has dodged a bullet regarding export duties, the European Central Bank’s decision to keep interest rates on hold this afternoon came with a sombre assessment of the bloc’s growth. The ECB’s accompanying statement struck a dovish tone, acknowledging that the economy remains fragile despite the reprieve from Washington.
Consequently, the US dollar is on the back foot. The greenback had surged earlier in the week as a safe haven, but those flows are reversing aggressively as the geopolitical temperature cools. Traders are dumping low-yielding government bonds and the dollar in favour of assets that benefit from global stability.
Looking ahead, the market narrative is likely to shift from politics back to fundamentals. With the “Greenland scare” in the rear-view mirror, traders will be scrutinising tomorrow’s PMI data to see if the recent volatility has left any mark on business confidence. For now, however, the overwhelming sentiment is one of relief.
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GBP: Pound surges on tariff U-turn and sticky inflation
Sterling is the clear outperformer today, buoyed by the dual tailwinds of geopolitical relief and shifting rate expectations. Yesterday’s rise in headline inflation to 3.4% has effectively taken an immediate Bank of England rate cut off the table, and with the threat of US tariffs now removed, investors are piling back into the pound. The currency is trading sharply higher against the dollar and has extended its gains against the euro.
GBP/USD: the past year
EUR: Relief rally tempered by dovish ECB
The single currency has recovered some ground following the withdrawal of US tariff threats, as the Eurozone would have been the primary casualty of a trade war. However, gains are being capped by the European Central Bank’s cautious tone today, with policymakers signalling that a “dovish pivot” could be coming if growth fails to pick up. While the acute political risk has faded, the economic divergence between the US and the Eurozone remains a headwind.
GBP/EUR: the past year
USD: Safe-haven unwind drives dollar lower
The greenback is sliding across the board as the “fear factor” exits the market. Investors are unwinding the safe-haven positions built up earlier in the week, pushing the dollar down against almost all major rivals. With the trade war risk sidelined and equity markets rallying, there is little demand for the dollar’s defensive qualities today.
EUR/USD: the past year
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