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The threat of an immediate transatlantic trade war has receded, replaced by a tentative sense of relief across global markets. President Trump’s call for “immediate negotiations” regarding the US purchase of Greenland has been interpreted by investors as a step back from his ultimatum of 10% tariffs on European goods.
While the geopolitical ambition remains, the shift from imminent economic punishment to diplomatic dialogue has allowed the “panic premium” to drain out of equities and safe-haven assets this morning.
With the immediate tariff threat sidelined, the market’s focus has snapped back to the diverging fortunes of the major economies. In the eurozone, the mood is darkening, the European Central Bank (ECB) published the minutes from its December, revealing some concern about economic stagnation but no imminent interest rate move.
Dovish signals from Frankfurt stands in sharp contrast to the news from London, where inflation’s rise to 3.4% in December and this morning’s surprising rise in retail sales in December has meant traders aggressively repricing their expectations and pushing back the likely timing of the next UK rate cut until the summer.
Meanwhile, the US economy continues to grow fast. Jobless claims data released yesterday showed a labour market in strong health, while yesterday’s final GDP data shows growth of 4.4%. The dollar, which had slipped on the geopolitical de-escalation, is finding fresh support from this economic resilience.
Markets are now in a holding pattern, waiting to see what today’s PMI data holds.
One to watch over the weekend for sterling, whether the resignation as MP of a key ally opens the door for a leadership challenge to the Prime Minister from Manchester mayor Andy Burnham, or whether the Labour leadership can defuse the threat via procedural barriers.
Make sure any upcoming transactions are protected against the risks of sudden market movements. Secure a fixed exchange rate now with a forward contract; call your Business Account manager on 020 3918 7255 to get started.
GBP: Pound rallies as data cools rate cut hopes
Sterling outperformed its major peers yesterday, driven by a sharp repricing of Bank of England interest rate expectations. Following the rise in headline inflation to 3.4%, and bolstered by today’s news of retail sales growth, markets have all but ruled out a rate cut in the first quarter. This has bolstered the pound’s appeal to yield-hungry investors. The pound has gained on the euro and is holding its ground against the dollar as the threat of UK-targeted tariffs fades. We still have the Purchasing Managers Index (PMI) coming up this morning, but that’s the end of the current round of high-level data.
GBP/USD past year
EUR: ECB minutes reveal concerns
The euro was in two minds yesterday, losing to the pound (marginally) but gaining on USD and the yuan, possibly in reaction to the minutes of the ECB’s latest meeting. This was broadly confident of recent economic performance in the eurozone while highlighting some anxieties too. They will be continuing their “wait and see” approach to interest rates. We will get another view on its economic health shortly, with PMI across the zone and then Ifo Business Climate on Monday.
GBP/EUR past year
USD: Dollar steadies on resilient jobs and GDP
After an initial wobble caused by the cooling of geopolitical tensions, the US dollar is being supported by yet another solid labour market report, which reinforces the view that the Federal Reserve can afford to keep rates restrictive for longer. That will not please Trump. While any “safe-haven” benefit from Greenland has evaporated (if it ever really existed), the dollar’s fundamental strength remains intact. Coming up later – PMI.
USD/GBP past year
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