Markets on edge ahead of Trump's tariff announcement and global tensions

Financial markets are feeling the pressure this morning, as Donald Trump prepares to unveil a fresh round of tariffs on April 2nd, which he has named "Liberation Day." It appears the tariffs will initially affect all countries, with certain nations deemed favourable being exempted at a later stage. As a result, most stock indices have opened lower, while gold, a traditional safe-haven asset, continues to reach new record highs. Forex markets have seen only minor movements, potentially due to traders growing accustomed to Trump’s combative rhetoric, which often fails to materialise. The GBP/USD has risen to 1.2965, while GBP/EUR is up to 1.1970, suggesting the UK may have limited exposure to the proposed tariffs.

In other news, Trump has publicly criticised Vladimir Putin for not swiftly endorsing his peace plan for Ukraine. Looking ahead, key economic events this week include the Eurozone inflation data, due tomorrow, and the US jobs report on Friday, which is expected to show an increase of 139,000 jobs in March. EUR/USD is trading around 1.0820.

Pound posts gains against the Euro amidst volatility and uncertainty

The British Pound has made three consecutive weekly gains against the Euro, though the upward momentum remains fragile and susceptible to reversals. A notable example of such volatility was seen on Friday when the GBP/EUR exchange rate rallied to 1.2025, only to retreat sharply, ending the day with a modest 0.37% loss.

This highlights the unpredictable nature of recent price movements, despite the overall upward trend in the past fortnight. The Pound remains well-supported against the Euro, with potential buying support likely to emerge around 1.1943, the low from last Wednesday. As of Monday, the exchange rate is approaching this level amidst weaker global equity markets, reflecting investor unease ahead of Wednesday's U.S. tariff announcements.

Typically, market sell-offs tend to weigh on the GBP/EUR rate, suggesting downside risks as we approach Wednesday’s tariff event. Uncertainty surrounding the scale and timing of Trump’s proposed tariffs is likely to cause erratic movements, with little conviction in the currency market's response. Beyond Wednesday, it becomes more difficult to predict, as the Pound has sometimes acted as a hedge against tariff news. Given the UK’s relatively low exposure to U.S. tariffs, the Pound has occasionally found itself well-supported during tariff announcements. If this trend continues this week, a rally towards 1.2025 or even higher could be possible as the week progresses.

EUR/USD

EUR/USD opened on a weaker footing following President Trump’s decision to impose a 25% tariff on imported vehicles, a move that poses a particular risk to the European Union given its strong reliance on automotive exports. However, the pair found solid support above the crucial 200 DMA level at 1.0727, rebounding to close the session at 1.0799.

The introduction of these tariffs, along with the potential for an additional 20% levy on EU goods, has injected significant uncertainty into currency markets. Nonetheless, Germany’s latest fiscal stimulus measures and increased EU defence expenditure have helped cushion the euro’s downside. The ECB now faces a challenging policy environment, having to weigh economic growth concerns against inflationary risks stemming from trade tensions. At the same time, Federal Reserve officials have voiced worries that prolonged tariff-related inflation could delay any future interest rate cuts. Currently, markets are pricing in a 15 basis-point reduction from the ECB, while the Fed is expected to hold rates steady, keeping a lid on EUR/USD’s long-term gains.

Despite ongoing trade tensions and near-term volatility, technical indicators suggest a potential bullish breakout if the pair clears the key resistance level at 1.095. For today, we expect EUR/USD to maintain support above the 200 DMA while attempting to retest resistance around 1.0800. Investors will be closely monitoring US income and spending data, which could offer further insights into consumer behaviour and help shape the pair’s short-term movement.

GBP

GBP/USD displayed resilience yesterday, holding firm in the upper range of its recent trading band, fluctuating between 1.289 and 1.295. From a technical standpoint, the outlook remains positive, with strong support clearly established at 1.287.

The latest UK economic data presents a mixed picture, as inflation fell to 2.8% in February—lower than market expectations. In the near term, the currency pair’s outlook remains cautiously optimistic, with potential to target 1.301 and 1.305, provided it stays above the 20-day SMA at 1.2902.

That said, notable challenges remain as the UK grapples with domestic economic pressures, including sluggish GDP growth of just 0.1% in Q4 and the looming increase in employers’ tax contributions, which could weigh on the pair’s momentum. For now, however, GBP/USD is expected to stay elevated.

Despite softer UK inflation figures and a bond issuance strategy that should have eased concerns about supply at the longer end of the yield curve, gilt yields remain higher than at the beginning of the week. This has intensified concerns over the sustainability of the Chancellor’s spending plans, with the fiscal buffer eroding. A worrying cycle could emerge in which fiscal anxieties push yields higher, further limiting the government’s financial headroom and exacerbating the Treasury’s challenges. While the pound is currently rising alongside gilt yields, this correlation could weaken if investor confidence wavers, as seen earlier in the year.

On the data front, the final UK GDP figures for Q4 2024 confirmed modest growth, with a slight upward revision on an annual basis from 1.4% to 1.5%. Retail sales data for February also surpassed expectations, increasing by 1% month-on-month compared to a forecasted decline of 0.4%. Strong performances in department stores, clothing, and household goods sectors contributed to this unexpected boost. This data raises further questions about how much room the Bank of England has to continue cutting interest rates, which is currently providing additional support for sterling.

AUD

The Australian dollar edged up slightly this morning, showing little reaction to the announcement that a general election will take place on 3 May.

Prime Minister Anthony Albanese followed this week’s federal budget— which included tax cuts, energy subsidies, and university loan relief— with a swift declaration of the upcoming election.

Despite the news, the Aussie remained largely unchanged, with AUD/USD continuing to trade within the narrow 0.6200–0.6400 range that has defined price action throughout much of the March quarter.

USD

The US dollar made modest gains on Wednesday as investors braced for President Trump’s imminent imposition of tariffs on automobile imports, semiconductors, and pharmaceuticals. The dollar index climbed to 104.50, reflecting a cautious mood ahead of the anticipated announcement on 2 April. In a move set to rattle global trade, Trump confirmed a 25% blanket tariff on all foreign car imports, sending shockwaves through financial markets.

Equity markets reacted negatively, with technology stocks bearing the brunt of the downturn. Tesla and Nvidia saw sharp declines of over 5.5%, dragging the Nasdaq down by 2%. The S&P 500 and Dow Jones also retreated, abruptly ending a three-day rally as investors weighed the potential ramifications of escalating trade restrictions. The bond market mirrored this sentiment, with Treasury yields dropping as investors sought the safety of government securities amid heightened uncertainty.

As global markets remain on edge, investors are closely monitoring the potential fallout—ranging from supply chain disruptions to corporate earnings pressures and retaliatory trade measures. The coming days will prove crucial in determining whether this latest tariff dispute is a temporary blip or the start of a more protracted economic challenge.

GBP

The UK Chancellor’s Spring Statement offered little in the way of optimism, yet one silver lining was the pound’s resilience alongside steady gilt performance—both shaken but far from shattered. While GBP/USD dipped below $1.2875, GBP/EUR remained steady within the €1.19-€1.20 range.

Chancellor Rachel Reeves unveiled a raft of fiscal measures against the backdrop of a downgraded economic outlook. The Office for Budget Responsibility slashed the UK’s 2025 growth forecast from 2% to just 1%, prompting the government to outline £15 billion in spending cuts, targeting welfare reforms and departmental budgets. Despite pledges to boost defence expenditure and housing initiatives, concerns persist over economic momentum and limited fiscal headroom.

Sterling was already under pressure ahead of the announcement following an unexpected slowdown in UK inflation, which eased to 2.8% in February on an annual basis. This fuelled speculation of Bank of England rate cuts, pushing yields lower and dragging the pound down. Yields briefly ticked higher when Reeves confirmed a 1.2% real-terms rise in day-to-day spending, but fell again after the government revealed a smaller-than-expected gilt issuance plan. The Debt Management Office scaled back long-dated bond sales to 13.4% from an estimated 17.2%. By the day’s close, gilts remained largely flat, while sterling saw only marginal losses against most major currencies.

The UK economy remains in a precarious position, and while Reeves has carved out some fiscal breathing space, long-term growth projections depend heavily on economic performance holding steady. Yet, despite the prevailing uncertainty, global investors are not turning away from the pound. Year-to-date, sterling has strengthened against 65% of the 50 global currencies tracked, posting a gain of over 2.5% against the US dollar this month alone.

EUR

The euro extended its losing streak on Wednesday, with EUR/USD sliding for the seventh consecutive session to the low $1.07's—marking a sharp retreat from its late-March high of $1.0950. The decline followed President Trump’s formal approval of a 25% tariff on automobile imports, heightening trade tensions and raising fresh concerns over the Eurozone’s export-driven economy.

Germany’s automotive industry, a cornerstone of European growth, finds itself in the firing line. Carmakers and suppliers are preparing for potential supply chain disruptions, while EU policymakers in Brussels weigh possible retaliatory measures. The tariffs come at a particularly delicate moment for the Eurozone, where economic growth remains fragile and inflation is finally easing—bolstering expectations of European Central Bank rate cuts later in the year.

For now, traders remain wary, with the euro under persistent pressure as markets assess the wider implications of Trump’s trade policy. Any signs of a more dovish stance from the ECB or an escalation in trade tensions could dictate the currency’s next move in the days ahead.

UK Budget 2025: Key Announcements from Chancellor Rachel Reeves

Chancellor Rachel Reeves has unveiled the UK Budget, outlining the government's fiscal policies for the coming years. The budget addresses tax policies, business measures, wages, transport, public services, and economic forecasts, among other significant areas. Below is a breakdown of the key announcements.

Personal Taxes

The rates of income tax and National Insurance (NI) paid by employees, as well as VAT, will remain unchanged. Income tax thresholds will rise in line with inflation after 2028, preventing more people from being dragged into higher tax bands as wages increase. The basic rate of capital gains tax on profits from selling shares will rise from 10% to 18%, while the higher rate will increase from 20% to 24%. However, tax rates on profits from selling additional property remain unchanged. The inheritance tax threshold freeze will be extended for a further two years until 2030, with unspent pension pots also becoming subject to the tax from 2027. Exemptions for inheriting farmland will be made less generous from 2026.

Business Taxes

Companies will pay National Insurance at a higher rate of 15% on salaries above £5,000 from April, up from 13.8% on salaries above £9,100, raising an additional £25bn a year. The Employment Allowance, which allows smaller companies to reduce their NI liability, will increase from £5,000 to £10,500. The tax paid by private equity managers on their share of profits from successful deals will rise from up to 28% to up to 32% from April. The main rate of corporation tax, paid by businesses on taxable profits over £250,000, will remain at 25% until the next election.

Wages, Benefits, and Pensions

The legal minimum wage for those over 21 will rise from £11.44 to £12.21 per hour from April. The rate for 18 to 20-year-olds will increase from £8.60 to £10 as part of a long-term plan to move towards a "single adult rate." Basic and new state pension payments will increase by 4.1% next year due to the "triple lock," outpacing the rise in working-age benefits. The eligibility for allowances paid to full-time carers will widen, increasing the maximum earnings threshold from £151 to £195 a week.

Transport

The 5p cut in fuel duty on petrol and diesel, which was due to end in April 2025, will be retained for another year. The £2 cap on single bus fares in England will rise to £3 from January, outside of London and Greater Manchester. The government has committed to funding tunnelling work to extend the HS2 high-speed rail line to Euston station in central London. Additionally, it has pledged to "secure the delivery" of the Transpennine rail upgrade between York and Manchester, following reports of potential cost-cutting measures. Air Passenger Duty will rise in 2026, increasing by £2 for short-haul economy flights and £12 for long-haul flights, while rates for private jets will go up by 50%. An extra £500m will be allocated next year to repair potholes in England. The Vehicle Excise Duty paid on all but the most efficient new petrol cars will double in the first year to encourage a shift to electric vehicles.

Drinking and Smoking

A new flat-rate tax of £2.20 per 10ml of vaping liquid will be introduced from October 2026, as ministers have decided not to link the levy to nicotine content. The tax on tobacco will increase by 2% above inflation, with hand-rolling tobacco taxed 10% above inflation. Tax on non-draught alcoholic drinks will rise in line with the higher RPI measure of inflation, while tax on draught drinks will be cut by 1.7%. The government will review the thresholds for the sugar tax on soft drinks and consider extending it to "milk-based" beverages.

Government Spending and Public Services

Day-to-day spending on the NHS and education in England will rise by 4.7% in real terms this year, followed by smaller increases next year. The Home Office budget will shrink by 3.1% this year and 3.3% next year in real terms, with the government attributing the cuts to assumed savings from the asylum system. Local councils will receive an additional £1.3bn next year and will retain all revenue from Right to Buy sales starting next month.

Defence Spending

Defence spending will increase by £2.9bn next year as part of the government's commitment to strengthening the UK's military capabilities. This funding boost is aimed at supporting national security, modernising the armed forces, and meeting NATO obligations. The government has pledged to invest in defence technology, cybersecurity, and intelligence operations to address global security challenges. Additionally, the increased budget will help improve personnel welfare and maintain critical defence infrastructure.

Tax Evasion Crackdown

The government has pledged to intensify its crackdown on tax evasion and avoidance, aiming to raise billions in additional revenue. New measures will be introduced to strengthen HMRC's powers, close tax loopholes, and ensure businesses and wealthy individuals contribute their fair share.

Housing

Social housing providers will be allowed to increase rents above inflation under a new multi-year settlement. Discounts for social housing tenants purchasing their properties under the Right to Buy scheme will be reduced. The stamp duty surcharge on second home purchases in England and Northern Ireland will increase from 3% to 5%. The point at which house buyers start paying stamp duty on a main home will drop from £250,000 to £125,000 in April, reversing a previous tax cut. Similarly, the threshold for first-time buyers will drop back from £425,000 to £300,000. The current affordable homes budget, set to run until 2026, will receive an additional £500m.

UK Growth, Inflation, and Debt

The Office for Budget Responsibility (OBR) predicts that the UK economy will grow by 1.1% this year, 2% next year, and 1.8% in 2026. Inflation is forecast to average 2.5% this year, 2.6% next year, before falling to 2.3% in 2026. The official definition of UK government debt has been broadened to include a wider range of financial assets, such as future student loan repayments. Budget policies are expected to increase UK borrowing by £19.6bn this year and by an average of £32.3bn over the next five years, according to the OBR.

Opposition and Criticism

The opposition parties have criticised the budget, arguing that it places too much of the tax burden on middle-income earners while failing to provide sufficient support for public services. Some business leaders have expressed concern over the National Insurance hike for companies, warning it could impact hiring decisions. Critics also argue that the tax increases on capital gains and private equity could discourage investment, while others believe the budget does not go far enough in addressing the cost-of-living crisis.

Conclusion & Potential GBP Impact

The UK Budget 2025 introduces significant changes across taxation, public spending, and economic policy. Chancellor Rachel Reeves has sought to balance investment in key areas while maintaining fiscal responsibility. The long-term effects of these measures will be closely monitored as the government navigates economic challenges and aims for sustainable growth.

Some analysts are wary about the outlook for the GBP, as spending cuts may hinder economic growth and trigger a sterling downturn. Concerns over the UK's fiscal situation persist, especially after stronger-than-expected public sector borrowing figures and uncertainty about the effectiveness of spending reductions.

If financial markets remain unconvinced that the Chancellor’s latest measures will restore fiscal stability, the pound could come under pressure. Its recent strong performance could further amplify any sell-off. Additionally, the UK’s fragile public finances, coupled with tariff threats from President Trump, could weigh on GBP and cap GBP/USD gains as it nears the $1.30 mark.