Currency market reacts to tariff concerns and US data ahead of key announcement

At the start of this week, the currency market adjusted to the growing tariff threat, with the US dollar strengthening across the board, the yen finding support, and high-beta currencies coming under pressure. The Australian and New Zealand dollars have again been the main underperformers, likely due to expectations that China will continue to be a central focus of US protectionism. In Australia, the Reserve Bank of Australia kept interest rates unchanged overnight, as anticipated. The AUD initially responded positively to the rally but has since returned close to yesterday’s closing level.

Despite recent movements, the dollar has plenty of room to rise if tomorrow’s tariff announcement takes a hawkish (risk-negative) tone, although it remains susceptible to downside pressure from economic data.

The US economic calendar will be pivotal in determining today’s FX movements. However, unless there is a surprise in the data, we would not challenge the dollar’s tentative recovery. Recent comments from the US administration have reduced hopes for a more lenient tariff announcement tomorrow, potentially pushing the DXY above 104.50 ahead of the key release.

Today, JOLTS job openings for February are expected to show a moderate decline to 7.6 million, with additional focus on layoff figures. The ISM manufacturing index for March is forecasted to fall below 50.0, reflecting the worsening sentiment in the sector due to tariff uncertainty.

EUR/USD

EUR/USD managed to maintain its position yesterday, staying above the 1.08 level as markets prepare for the forthcoming "Liberation Day" tariff announcements from the Trump administration. The broader impact of these tariffs is adding to the prevailing uncertainty.

Germany's March inflation figures, which show a slowdown to 2.3% year-on-year, suggest potential interest rate cuts from the ECB, which could exert additional downward pressure on the euro in the longer term. However, in the near term, attention will remain focused on the reciprocal tariff announcements scheduled for 2nd April, as well as any retaliatory measures from Europe. This is likely to help keep the EUR/USD elevated for today.

With solid support at the 200-day moving average (DMA) at 1.0728, we expect the pair to remain above this level. However, potential gains appear limited due to ongoing concerns about global stagflation and recession risks. Today's EU inflation data is anticipated to show softer price pressures within the economy, helping to keep the pair within range.

GBP/USD

GBP/USD has managed to hold steady, maintaining its range between 1.29 and 1.30. The immediate technical outlook for the currency pair appears cautiously optimistic, with stability around the 1.29 mark. The Bank of England's cautious stance on monetary policy, influenced by February's CPI reading of 2.8% year-on-year, has sparked speculation about potential interest rate cuts in May. However, market focus remains on the near-term outlook, particularly the upcoming "Liberation Day" tariff announcements from President Trump, scheduled for 2nd April. Of particular interest is the proposed 25% tariff on the automotive sector, which could have significant implications for global trade dynamics.

While recent weakness in the US dollar has provided some support for sterling, this trend could quickly reverse depending on the scale of the impending tariff package. As such, the 1.2805 support level remains a critical area to watch for any signs of bearish momentum.

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.