Shifting sands in the currency markets as policy and politics collide

The euro has mounted an impressive rally, soaring to levels not witnessed in years against the U.S. dollar and a basket of other prominent currencies. This upward movement has largely stemmed from unease surrounding capital outflows from the United States and mounting global trade frictions. In a bid to cushion the eurozone economy against potential disinflationary forces, the European Central Bank (ECB) is widely tipped to trim its benchmark interest rate by 0.25%, bringing it down to 2.25%.

The greenback has slipped to its lowest point in three years against the euro. This slump is closely linked to investor jitters over capital flight and the dampening effects of U.S.-imposed tariffs, which have cast a long shadow over market sentiment. Although there has been a partial reprieve with some levies temporarily lifted, the broader consequences have favoured the euro over the dollar. The future path of the dollar is likely to hinge on how U.S. trade manoeuvres evolve and whether confidence among investors returns. Should diplomatic winds shift and tensions subside, the dollar could regain some footing; failing that, its downward drift may continue.

Meanwhile, sterling remains steady near the 1.3200 mark against the dollar. Recent figures from the UK labour market revealed that the unemployment rate has held at 4.4%. However, wage growth data came in below expectations, casting a slight shadow over the pound. The currency is also navigating renewed interest from speculators, particularly in the lead-up to Wednesday’s inflation release and Thursday’s ECB verdict.

Should the upcoming inflation report show limited headway toward the Bank of England’s 2% target, UK bond markets may come under pressure—a scenario that may offer little solace to the pound. Nonetheless, Thursday could bring a different twist. If the ECB takes a more cautious approach, especially in light of recent gains in the euro’s trade-weighted index and its potential to curb inflation and hinder exports, the pound might benefit from a shift in momentum. Should the ECB adopt a more accommodative tone, the single currency may experience a retreat. Conversely, any unexpected pivots in policy could inject fresh volatility into the markets.

Investors continue to tread carefully, with global political developments and economic signals under close scrutiny. Traditional safe-haven assets, such as gold, remain in demand, with prices maintaining a firm grip above the $3,200 level amidst ongoing trade-related uncertainty.  

Market participants shift focus from data to trading headlines

Traditional economic indicators have taken a back seat in influencing market movements, as the spotlight remains fixed on President Trump’s ongoing trade-related declarations and the swift responses from global economic powers.

The ongoing trade dispute between the United States and China has emerged as the principal catalyst behind the recent decline in the US Dollar and the concurrent surge in the Euro. However, the Pound Sterling has derived comparatively limited benefit from these movements, largely due to the simultaneous downturn in the US Treasury market — a key influence on the UK’s Gilt market.

US President Donald Trump instigated one of the most tumultuous trade confrontations in recent decades. On 2nd April — dubbed “Liberation Day” — he introduced sweeping reciprocal tariffs affecting more than 180 countries, with America's primary trading partners bearing the brunt. Merely a week later, he implemented a temporary 90-day suspension on the majority of these measures, beginning 9th April, although China was notably excluded. A general tariff of 10% remained in place across the board.

Further escalating tensions, Trump declared via Truth Social: “Given China’s blatant disregard for global market norms, I am hereby raising tariffs imposed by the United States on Chinese imports to 125%, effective immediately.” In retaliation, China announced an equivalent increase in its own tariff rate from 84% to 125%, effective Friday. This tit-for-tat escalation triggered a substantial sell-off of the US Dollar, propelling the EUR/USD pair to its highest level in months.

EU halts tariff retaliation amid trade tensions and recession fears

The European Union has also decided to temporarily suspend its retaliatory tariffs in response to the escalating global trade conflict.

EU Commission President Ursula von der Leyen announced that the bloc would delay the implementation of 25% tariffs on €21 billion worth of American imports for a period of three months, allowing space for diplomatic negotiations. “Should discussions prove unproductive, our countermeasures will be enacted,” she stated.

Investor sentiment fluctuated sharply in response to ongoing trade war developments. Optimism briefly returned following the EU’s announcement, but quickly faded as concerns resurfaced. Equity markets declined as the trading week drew to a close, with mounting anxiety over a potential recession in the United States that could ripple across other leading economies due to the broad imposition of trade tariffs. Market participants are also wary of increased inflationary pressures, which might prompt central banks to raise interest rates.

Despite traditionally being viewed as a safe-haven asset, the US Dollar weakened, as mounting fears of a recession began to outweigh its usual appeal in times of uncertainty.

The 90-day suspension is expected to be marked by intense diplomatic efforts as the US and its trading partners scramble to resolve disputes and forge more favourable trade arrangements. However, tensions between Washington and Beijing are likely to escalate further, keeping global markets on edge.

At the same time, the widespread introduction of tariffs is anticipated to fuel inflation both in the US and globally, potentially compelling major central banks to reassess their monetary strategies.

Looking ahead

Key releases are on the horizon. The US will unveil its March Retail Sales figures, while Fed Chair Jerome Powell is set to speak at the Economic Club of Chicago on Wednesday — an event that could offer fresh hints on monetary policy direction.

Also on Wednesday, market participants are closely monitoring the upcoming UK CPI release for indications of inflationary trends. Given the recent economic developments, including changes in fiscal policies and global trade dynamics, the data could influence expectations regarding future monetary policy decisions. Investors and analysts will be particularly attentive to any shifts in the inflation rate, as this could impact the Bank of England's approach to interest rates and economic growth projections.

On Thursday, the European Central Bank (ECB) is expected to announce its latest monetary policy decision. Markets broadly anticipate a 25 basis-point rate cut, but attention will be firmly placed on President Christine Lagarde’s post-decision remarks. Investors will be looking for any signal on whether the ECB plans to pause its easing cycle or continue amid inflation risks tied to the ongoing trade conflict. A dovish stance could strengthen the Euro, particularly given the general weakness of the US Dollar, although the reverse may also hold true.

With the Easter break approaching, the trading week will be shortened. Most financial markets will observe a closure on Good Friday & Easter Monday, adding to the likelihood of reduced liquidity and heightened volatility. Attention will continue to centre on President Trump’s ongoing trade pronouncements and the rapid reactions from major global economies.

Sterling sinks against Euro as greenback sell-off sparks surge in single currency

The pound is set to post its steepest weekly decline against the euro since September 2022, as Friday trading unfolds under the weight of a broad-based collapse in US dollar exchange rates and a dramatic upswing in the euro. GBP/EUR appears likely to consolidate within a narrow band between 1.1428 and 1.1560 at interbank (IB) throughout the session.

During overnight trading in Asia, the pound fell by as much as 0.83%, reaching a low of 1.1489 before the London open. Despite some partial recovery, the pair remains subdued, largely due to a sharp 1.5% rally in EUR/USD, which climbed to its highest level since February 2022.

Sterling's retreat comes against the backdrop of widespread upheaval in USD-denominated markets. The US dollar has slumped as current account surplus currencies—most notably the euro, Swiss franc, and Japanese yen—have surged by over 2% this week alone.

This shift appears to be a reaction to the latest trade policies emerging from the White House, which are aimed at repatriating manufacturing of consumer goods. While the long-term impacts remain uncertain, the immediate effect is anticipated to dent corporate America's profit margins, challenging the lofty equity valuations that have defined US markets since the early days of Donald Trump's first presidency.

The equity sell-off has, in turn, provided significant momentum for safe-haven and surplus-area currencies. The euro, franc and yen have all benefitted, pushing down the trade-weighted dollar and renminbi. The Chinese currency has also breached key psychological thresholds against the franc, yen and euro, falling well below levels seen as acceptable by Beijing.

The simultaneous declines in both equities and the US dollar have created a feedback loop that risks becoming self-sustaining. Global investors tend to hold only limited currency hedges on overseas equities, meaning that when the dollar falls, their total exposure suffers a double blow—both from declining asset values and adverse exchange rate movements. This can prompt further equity sales, perpetuating the cycle.

Further compounding matters is the structural link between the US dollar and Chinese renminbi, stemming from Beijing’s basket-based management of its currency. This correlation means weakness in one tends to be mirrored by the other, amplifying the impact across global markets.

US inflation cools sharply in March, but tariff fears rattle markets

The U.S. Consumer Price Index (CPI) report released yesterday, showed that inflation cooled more than expected in March. Overall, prices dropped by 0.1% from the previous month — the first monthly decline since May 2020. On a year-over-year basis, inflation slowed to 2.4%, down from 2.8% in February and under the projected 2.6%. Core CPI, which excludes volatile food and energy costs, rose just 0.1% in March and registered a 2.8% increase over the past 12 months, its slowest pace since March 2021.

The drop in inflation was primarily driven by a 6.3% decline in gasoline prices, alongside falling costs for airline fares, used vehicles, and auto insurance. However, some categories still saw price increases, including food, medical care, apparel, and new vehicles. These mixed trends suggest inflation is cooling, but not uniformly across all sectors.

Despite the encouraging signs, markets reacted nervously. Stock indices like the S&P 500 and Nasdaq fell sharply amid concerns about future inflation pressures stemming from new trade policies. President Trump's recently announced 125% tariff on Chinese imports has raised fears that rising import costs could reverse some of the inflation gains. While the Fed may interpret the CPI data as supportive of a less aggressive stance on interest rates, ongoing trade tensions add a layer of uncertainty to the inflation outlook.

UK economy surges 0.5% in February, beating forecasts as manufacturing leads growth

Today, data out showed the UK economy grew by 0.5% in February 2025, outperforming forecasts of just 0.1%. This represents the fastest monthly expansion since March 2024 and comes after revised data showed flat growth in January, instead of the previously estimated decline. On an annual basis, GDP was up 1.4%.

Driving the growth was a 2.2% jump in manufacturing output—led by strong gains in the electronics, pharmaceutical, and automotive sectors—along with a 0.3% rise in services. Finance Minister Rachel Reeves called the results "encouraging," though there are still concerns about the possible fallout from new U.S. tariffs on UK exports, which could raise costs by at least 10%.

Market participants will also be watching the U.S. Producer Price Index (PPI) for March 2025 is set to be released today. Economists are expecting a 3.3% year-over-year increase, a slight uptick from the 3.2% recorded in February.

Last month, the PPI showed no change on a monthly basis, as a 0.3% rise in goods prices was offset by a 0.2% drop in service costs. Markets will be watching today’s figures closely for signs of underlying inflation, which could play a role in shaping the Federal Reserve’s next policy moves.

U.S. Dollar under pressure as trade war Intensifies

The U.S. dollar, typically regarded as a safe-haven currency during periods of global uncertainty, has come under significant pressure. Investor confidence in the greenback has been dented by President Donald Trump’s decision to impose a 104% tariff on Chinese imports, contributing to a depreciation of more than 5% so far this year. Adding to concerns, long-dated U.S. Treasury yields have surged by over 40 basis points in the space of a week, reflecting broader unease about the reliability of U.S. assets in the current climate.

Tensions between the United States and China have intensified sharply, with both countries ramping up tariffs and retaliatory measures. The resulting uncertainty has fuelled volatility across global markets. Asian equities saw a brief rally following President Trump’s announcement of a 90-day pause in the trade war for most trading partners—retaining a general 10% reciprocal tariff while increasing levies on Chinese imports to 125%. The market interpreted this pause as less aggressive than initially feared, offering a momentary boost in sentiment.

However, the situation soon escalated again. President Trump signed an executive order tripling tariffs on low-value parcels (under $800) arriving from China and Hong Kong. The revised tariff structure raises the cost to 90% of a parcel’s value or a fixed $75 per item, replacing the previous thresholds of 30% or $25. These measures are scheduled to take effect on 2 May 2025 and are expected to hit a broad range of consumer goods.

Safe-haven assets in demand as market turmoil deepens

These developments point to a broader shift in investor sentiment, with traditional safe-haven assets such as the yen, franc, gold, and increasingly the euro, gaining favour. Meanwhile, confidence in the U.S. dollar has waned amidst intensifying trade tensions and unpredictable fiscal policy in Washington.

Japanese Yen (JPY):
The Japanese yen has gained in value as investors turn to safer assets amidst heightened market volatility. This comes despite Japan being subject to a 24% reciprocal tariff from the United States. The yen’s reputation as a reliable safe haven has underpinned its recent strength, with USD/JPY trading around the 146.69 mark.

Swiss Franc (CHF):
The Swiss franc has similarly attracted increased demand. The USD/CHF pair is expected to continue its decline towards the 0.8500 level, reflecting growing investor confidence in the franc as a stable refuge amid uncertainty.

Gold:
Gold prices have soared to record highs, surpassing $3,000 per ounce. The surge has been driven by consistent safe-haven inflows, as market participants look to shield themselves from ongoing currency and equity market instability.

Euro (EUR):
Notably, the euro has begun to act as a secondary safe-haven currency. Despite ongoing economic concerns within the Eurozone, the single currency has benefited from capital outflows away from the United States and other higher-risk environments. The European Central Bank’s relatively steady stance and the euro’s role in global reserve holdings have helped support its appreciation.

U.S. CPI Data Release: Key Insights into Inflation Outlook

The U.S. Bureau of Labor Statistics is set to publish the Consumer Price Index (CPI) data for March 2025 today. This release is expected to offer important insights into the current inflationary environment, with potential impacts on various financial markets. Market participants will need to pay close attention to the figures, as they could influence Federal Reserve policy decisions and broader economic trends. Forecasts indicate a modest monthly rise of 0.1%, largely due to lower energy prices. On an annual basis, this would equate to a 2.6% increase, a slight decrease from February’s 2.8%.