China and US agree to lower tariff rates allowing USD to rebound this morning
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Daily Currency Update
European Central Bank Governing Council member, Gediminas Simkus, said on Friday that the; “Eurozone’s inflationary direction entirely depends on the EU’s retaliation to US tariffs.” He added that there is a significant lack of clarity for the economy presently and that there is no central scenario for ECB rates. Gediminas said it is most likely that a June rate cut will be required as projections for the European economy are worsening.The Pound surged on Friday edging up 0.41% after the announcement of a trade deal between the UK and the US which leaves tariffs of 10% on UK goods but opens markets for both countries. Governor Andrew Bailey, said that the trade deal was good but noted that 10% tariffs on most British exports is higher than they were last month. Markets are now pricing in a 50% chance of a further 25 basis point cut by the Bank of England when they meet in July.
The US Dollar continued to trade cautiously despite a wave of trade optimism. However investors cited extreme concern over how erratic and unpredictable the US administration is under President Trump. Both Trump and Vance reignited their attacks on Fed Chair Jerome Powell last week and also suggested that 80% tariffs on China “seemed right.” It is expected that globally tariffs will normalise at 22% which would be a four-fold increase since Trump took office.
Key Movers
The current political upheaval in Romania, central Europe’s second-largest economy, has place the countries coveted investment grade rating at risk of being downgraded from BBB to “junk” status. Newly elected George Simion’s victory has triggered the collapse of the pro-Western coalition government and is causing widespread concern over the country's already heavily strained finances. Rating agencies warned that policymaking would become more fragmented and less stable over the coming months. This typically tends to put off conservative international investors and pushes up borrowing costs.UK markets have been on a rollercoaster ride for years, with the latest selling spree in January pushing the Pound to 14 month lows and 10 year gilts yields to 17 year highs as fiscal and market stability fears fed on each other. That said UK asset prices have been steeply discounted for some time and investors are looking to diversify assets away from the US and this has benefited the UK as the Pound has surged to a 38 month high vs the US Dollar. Ratings agencies said the “UK is more immune to the direct impact of trade wars and so as a place to hide, it is not the worst.”
Focus this week has been squarely on trade negotiations between the US and China with elevated enthusiasm after the UK/US trade deal negotiated last week. It does appear that the US administration is extending olive branches to certain countries and that perhaps the worst of the trade wars is behind us, at least that is what markets are pricing in. On foot of this the US Dollars slide in recent months has taken a moment of pause with the greenback stabilising against its G-7 counterparts.
Expected Ranges
- GBP/USD: 1.3215 - 1.3270 ▲
- GBP/EUR: 1.1840 - 1.1890 ▲
- GBP/AUD: 2.0540 - 2.0600 ▲
- EUR/USD: 1.1130 - 1.1180 ▲