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Sterling slides as China/US trade war escalates

GBP - British Pound

It was another miserable day for the pound yesterday as risk off trade and no positive news re: Brexit saw GBP/USD take another leg lower. Cable had been trading close to the 1.32 handle on Friday 3rd May however cross-party talks between the Conservatives and Labour appear to be going nowhere with pressure building on PM Theresa May from her back benchers to pull out of the talks and put in place a clear road map for her departure. The idea of a Customs Union with the EU (albeit only a temporary one) had been propping up the pound however this idea is anathema to hardcore Brexiteers and the chances of it happening appear to be fading so it seems the saga is going to rumble on for some time yet forcing the UK into taking part in next weeks EU parliamentary elections. In normal circumstances last weeks upbeat UK GDP print (0.5% q/q) would have bolstered the pound however the devil was in the detail with a lot of the extra output being down to pre-Brexit stockpiling and the accompanying month on month print showing an economy once again grinding to a halt. GBP/USD is heading back to 1.29 and a break below could be on the cards later today even if this morning's wage and employment data prints in the green.

Key Movers

Risk assets have been hit hard by the unexpected escalation in the US/China trade war with US President Donald Trump announcing a further $300bn worth of Chinese goods that are set to be hit with tariffs by the end of June. In response the Chinese have outlined around $60bn worth of US goods that will be taxed from the beginning of June. The tit for tat measures have hit equity markets hard with stock markets around the world slumping on the news and all eyes now focusing on the G20 summit in Osaka on 28th and 29th June as a date we will hopefully see an announcement of a deal between the two sides. Despite the raising of the stakes Donald Trump tweeted that he still expected a deal to be done in the next few weeks which seems slightly perplexing given the ratcheting up of tensions.

All the usual riskier assets have been hit hard over recent days with AUD/USD hitting its lowest level since Jan 2016 (January's flash-crash aside) moving below the .6950 handle. USD/JPY was close to falling below 109 yesterday as investors sought the safety of yen. USD/CHF has also fallen heading back towards parity as its safety was also sought.

Rather strangely the euro has been relatively unmoved as hopes gather that the German economy may be over the worst of its recent troubles. EUR/USD trades at 1.1240 ahead of todays German ZEW Economic Sentiment report and tomorrow's Q1 GDP print with a rebound from no growth to 0.4% eyed by analysts. GBP/EUR trades around 1.15.

Expected Ranges

GBP/USD: 1.2890 - 1.3040 ▼

GBP/EUR: 1.1460 - 1.1630 ▼

GBP/AUD: 1.8540 - 1.8720 ▼

GBP/NZD: 1.9595 - 1.98 ▼

GBP/CAD: 1.7375 - 1.7520 ▼