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Tariffs sent shockwaves through the US, China and Europe on Monday.
The euro endured another manic Monday as markets scrambled to adjust to signs of aggressive US trade policy. Donald Trump’s threat to extend his recently unveiled tariffs on Canada, Mexico and China to the eurozone sent European stock markets plunging and the euro down sharply.
For the second Monday in a row, markets started their week reacting to seismic news. This felt more significant than Chinese AI advances, though. For weeks, commentators have been debating whether Trump would be quite as forceful on trade as he promised. After the events of the weekend, it seems we have our answer and can expect currency markets to go political.
Europe’s leaders responded strongly to potential trade tariffs. Ireland’s taoiseach Simon Harris urged the eurozone to act “as one”, while a French central banker cautioned against underestimating their significance. Several promised swift retaliation should they be imposed.
In a sign of Trump’s unusual style of governance, the US president suggested the UK might be spared the worst of the trade war due to his good relationship with Sir Keir Starmer. Trump noted that Starmer had been “nice” to him as he made the transition into the White House. Few in Downing Street will wish to base economic policy on that glib (and likely shifting) observation.
Instead, Keir Starmer looks to be heading down the “have your cake and eat it” route. The prime minister has been careful in his dealings with Trump so far and joined European leaders at the Palais d’Egmont in Brussels last night. Defence was on the agenda but you can bet the issue of trade was raised once or twice.
Economic data was for once overshadowed by this circus. Italian inflation rose while ISM manufacturing PMI figures from the US moved into positive territory (i.e. above 50, indicating growth) for the first time in 26 months.
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GBP: Tariffs tip Bank scales
Based on the latest data, markets put the likelihood of a quarter-point Bank of England interest rate cut on Thursday at over 90%. What was billed as a close decision now appears a given. Sterling is now at risk from a double shock and GBP/USD could have further to fall.
GBP/USD: the past year
EUR: Inflation fades into insignificance
New inflation data would usually have been a significant event on Monday’s calendar. Headline consumer price inflation (CPI) in the eurozone climbed from 2.4% to 2.5% in January, yet the euro still struggled to keep its head above water amid the threat from across the Atlantic.
GBP/EUR: the past year
USD: Tariffs likely to increase prices
The standard economic trade-off of protectionist policy is an increase in inflation. Despite seeing just how politically potent this was on the campaign trail, Trump doesn’t seem to care, preferring instead to widely threaten tariffs. This is good news in the short term for the US dollar, which made further advances over its rivals yesterday.
EUR/USD: the past year
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