G7 braces for Trump administration’s tariffs amid inflation fears
Daily Currency Update
As yield differentials have widened in favor of the US over Europe, it has weighed heavily on the single currency, reflecting the increasingly divergent performance of both economies. The ECB is widely expected to reduce borrowing costs by 50 basis points at its December meeting, following recent dismal economic data and a politically gridlocked landscape. However, ECB council members are urging caution against reducing rates too quickly.In the UK, retail sales have been surprisingly revised lower for several months, a trend echoed by weaker November PMI data. The outlook for growth in the fourth quarter is forecast to be poor, following weaker-than-expected UK growth in Q3 of this year. UK companies are also concerned about the recent budget, which targets them with tax increases. On a more optimistic note, the UK Government is expected to dramatically increase spending next year, which should bolster the economy.
The US Dollar slipped yesterday as markets digested the appointment of Scott Bessent as Treasury Secretary. He is known for being market-friendly, hawkish on the Federal deficit, and favoring a gradual approach to US tariffs on imports. The real question markets are contemplating is whether he will be able to temper President Trump's more aggressive policy initiatives.
Key Movers
The ECB Chief Economist, Philip Nagle, stated that they are increasingly confident their actions to tackle disinflation are working. However, he emphasised that interest rates must come down slowly, as risks persist due to global geopolitical tensions and the political situation across Europe. The ECB’s view is that European growth is likely to stagnate in Q4, with Germany performing well below the Eurozone average. Additionally, Trump's tariffs appear to be highly inflationary, prompting the ECB to exercise caution.Markets have lowered expectations for a UK rate cut next month. Recent data indicates that inflation in the services sector remains stubbornly high, causing concern for the Monetary Policy Committee. Figures released this week confirm that the price of goods has risen by 2.3%, which should provide some support for the Pound at current levels. Attention will turn to Bank of England Chief Economist Huw Pill when he speaks at 3 pm today.
The US Dollar has performed exceptionally well throughout November. President Trump's expansionary policies are expected to stoke inflation, suggesting the Federal Reserve might take a slightly slower approach to reducing rates. Coupled with geopolitical risks in Ukraine and the Middle East, this should provide a tailwind for the safe-haven US Dollar during any market downturns.
Expected Ranges
- GBP/USD: 1.2540 - 1.2595 ▲
- GBP/EUR: 1.1945 - 1.1995 ▲
- GBP/AUD: 1.9360 - 1.9415 ▲
- EUR/USD: 1.0485 - 1.0540 ▲