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.

Sterling Slides as UK Inflation Cools More Than Expected

The latest UK inflation data for February came in lower than anticipated, leading to a decline in the value of the British Pound against the Euro, Dollar, and other major currencies. According to the Office for National Statistics (ONS), the Consumer Prices Index (CPI) inflation rose by 0.4% on a monthly basis, falling short of the forecasted 0.5%.

On an annual basis, CPI inflation dropped to 2.8% from January’s 3.0%, defying expectations of a more modest decline to 2.9%. The primary driver of this slowdown was the clothing and footwear sector, which recorded a year-on-year price decline of 0.6%—its first negative reading since October 2021.

Services inflation, a key metric monitored by the Bank of England, remained unchanged at 5.0%, while core CPI inflation, another critical measure, eased to 3.5% from 3.7%—again undershooting expectations of 3.6%.

Despite inflation remaining well above the Bank of England’s 2.0% target, the lower-than-expected figures prompted a market reaction. The Pound weakened following the announcement, with the Pound-to-Euro exchange rate slipping from 1.20 to 1.1982, and the Pound-to-Dollar rate falling from 1.2940 to 1.2920.  The data has fuelled speculation of a further interest rate cut by the Bank of England in May, with traders now assigning an 80% probability to such a move. The increasing likelihood of a rate cut has coincided with a dip in UK bond yields and a weaker Pound.

However, the Bank of England remains constrained in its ability to aggressively reduce rates, as inflationary pressures persist. Economists caution that inflation could climb again, driven by rising National Insurance contributions and increasing energy and water costs.  Andrew Sentance, a former member of the Bank’s Monetary Policy Committee, has warned that CPI inflation could exceed 4% in the coming months, suggesting that "5% or more is on the cards for the autumn."

With inflationary forces still at play, the downside for UK bond yields and Sterling may be limited in the near term.

Treasury Faces Tough Choices as Spring Statement Approaches

With the Spring Statement on the horizon, Shadow Chancellor Rachel Reeves is focused on recovering the £10bn in ‘headroom’ that has been lost. To achieve this, the Treasury is expected to scale back its future spending plans, with new welfare cuts already anticipated. The remainder of the savings is likely to be found through reductions in departmental budgets.

However, spending cuts alone may offer only a short-term solution to deeper fiscal challenges. According to the International Monetary Fund (IMF), the UK has experienced the steepest rise in gross government debt among 40 advanced economies.

This surge in debt is largely attributed to sluggish economic growth and the lasting financial impact of government measures taken during the pandemic, alongside rising energy costs. In a climate of slow growth and elevated interest rates, reducing public debt as a proportion of GDP is becoming an increasingly difficult task.

US Dollar Struggles as Economic Uncertainty Grows

The US Dollar remains on course for its worst monthly performance in over a year, with a decline of 3.2%.

Optimism that Trump’s tariffs would bolster US economic growth has now given way to concerns over stagflation and recession, as investors grow increasingly doubtful about the administration’s economic approach. Consumer confidence took a sharp downturn in March, with the Conference Board’s index falling to 92.9—its lowest reading in four years. The expectations component suffered an even steeper decline, dropping nearly 10 points to a 12-year low, signalling heightened anxiety among households over rising prices and worsening economic conditions.

Federal Reserve officials, meanwhile, continue to adopt a cautious stance. Governor Adriana Kugler pointed to an increase in inflation expectations and higher goods prices, reinforcing the central bank’s reluctance to ease monetary policy too soon. Her remarks suggest that policymakers remain wary of premature rate cuts, particularly given recent inflation surprises that have kept concerns over price pressures alive.

Adding to market uncertainty is the lack of clarity surrounding US trade policy. Trump hinted on Monday that some of his proposed tariffs might not take effect on 2 April, sparking speculation that the administration could take a more flexible approach. However, his decision to introduce “secondary tariffs” on countries purchasing Venezuelan oil has injected further unpredictability into US trade relations, raising fears of wider economic and diplomatic consequences.

Euro’s Prospects Remain Mixed Amid Tariff Uncertainty

While the euro has faced recent pressure, supportive fiscal and monetary policies are expected to drive further gains in the future or at least mitigate some of the impact of US tariffs on the Eurozone. Investor confidence and business activity in the region are showing signs of improvement, pushing bond yields higher. However, currency traders remain cautious ahead of Trump’s impending tariff deadline next week, particularly as the euro is set for its strongest monthly performance in over two years—making profit-taking a likely scenario.

Lingering uncertainty over Trump’s retaliatory tariffs could keep demand high for safe-haven assets, including the US dollar, in the coming days. As with many of Trump’s policy decisions, the situation remains fluid, with no outcome certain until the president makes an official announcement.

Nonetheless, Germany’s historic stimulus measures and the broader Eurozone’s proactive fiscal policies could help cushion the economic blow from tariffs, reducing potential downside risks for the euro. However, given its recent strength, some of the euro’s upside may already be factored into market pricing.

Sterling Faces Mixed Fortunes as Markets Weigh Economic Signals

The pound started the week on a firmer footing against major global currencies, buoyed by fresh PMI data indicating the fastest expansion in UK business activity in six months—an encouraging sign of economic momentum in early 2025. However, its gains were quickly reversed as stronger-than-expected US PMI figures shifted market sentiment, dragging GBP/USD lower. The pair remains stuck within a tight range, with $1.30 acting as an upper barrier and $1.28 providing support. Against the euro, sterling has slipped 1.4% this month but continues to trade two cents above its two-year average of €1.17.

A surge in financial and consumer services demand propelled the UK’s services sector to its strongest growth since August, surpassing market forecasts. In contrast, manufacturing continues to struggle, with the sector shrinking for a sixth straight month and hitting its lowest reading since late 2023. Nevertheless, with services accounting for 80% of UK economic output, their resilience bodes well for overall growth in the first quarter, following a sluggish second half of 2024.

Meanwhile, expectations of Bank of England (BoE) rate cuts have been dialled back after last week’s slightly hawkish policy stance. With wage pressures and inflation remaining persistent, markets are questioning how much room the BoE has to lower borrowing costs this year. Notably, the latest PMI data revealed a sharp rise in service sector input prices, largely driven by wage inflation and suppliers passing on higher costs.

As a result, money markets now see a 60% likelihood of a 0.25% BoE rate cut in May, with total reductions for the year expected to reach 45 basis points—down from over 60 basis points priced in at the start of the month. This shift is likely to limit gains in short-term government bonds while offering some support to sterling through the yield channel. However, with key inflation data and Wednesday’s Spring Statement on the horizon, fresh volatility could lie ahead for the pound.

US Economy Sends Mixed Signals as Markets Stay Upbeat

The latest economic data from the United States paints a conflicting picture, with manufacturing slipping back into contraction territory as the sector’s PMI dipped below 50. Inflationary pressures in manufacturing have surged to their highest level in nearly two years, largely due to tariffs. Meanwhile, business confidence for the year ahead has dropped to its second-lowest level since October 2022, reflecting growing unease over demand and policy direction under Trump’s administration.

Despite these concerns, investors chose to focus on the positives. The composite PMI surged to 53.5, surpassing expectations, driven by a strong rebound in the services sector. After hitting a 15-month low in February, services activity rebounded to a three-month high, fuelled by stronger customer demand, improved business inflows, and better weather conditions. With this resurgence, fears of an imminent recession appear to be fading.

That said, a disconnect remains between different sets of economic data. While softer indicators, such as sentiment surveys, have underperformed in recent months, more concrete measures—including employment, industrial production, and consumer spending—have held up well. This divergence is adding to uncertainty over the true state of the economy and complicating the Federal Reserve’s next steps. The Fed remains highly data-driven, balancing the risk of cutting rates too soon—potentially reigniting inflation—against the danger of keeping rates elevated for too long, which could hamper growth.

For now, selling pressure on the US dollar is easing, supported by strong PMI data and diminishing fears of a slowdown. Reports also suggest that Trump’s upcoming tariff measures on April 2 may be softer and more targeted than initially feared. However, even if trade tensions and recession risks intensify, the dollar is unlikely to fall out of favour entirely, given its traditional role as a safe-haven currency during periods of heightened market uncertainty.