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Sterling steadied itself on Wednesday as the US dollar continued to come under pressure.
Sterling recorded a small daily advance against the euro and a slightly larger one against the US dollar yesterday, a day when Europe’s politicians took aggressive countermeasures against American trade tariffs.
UK prime minister Keir Starmer took a less confrontational position, saying that while he didn’t rule retaliatory tariffs out, these would not be his immediate response. That helped sterling stay out of the fray for the most part and allowed GBP/EUR to strengthen by about 0.3%, still half a cent down from Monday. GBP/USD meanwhile pushed ahead by more than half a cent.
European Central Bank (ECB) president Christine Lagarde said policymakers were unable to guarantee inflation falling to the 2% target amid “exceptionally high” uncertainty. Her words came as the European Union announced tariffs on up to $28bn in American goods.
Yesterday we learned US headline inflation fell to 2.8% in February, a larger fall than the majority of surveyed economists had expected. Core inflation, which omits price rises for more volatile goods, meanwhile fell to its lowest in almost four years. Egg prices – heavily politicised in the election campaign – surged by over 10% month-on-month amid an avian flu outbreak.
The Bank of Canada yesterday voted to cut interest rates from 3% to 2.75%, the third quarter-point cut in as many months. Policymakers noted that economic output had exceeded expectations in recent months, but bumps in the road lay ahead with trade tariffs and the souring relationship with its noisy neighbour.
Representatives from the United States and Russia will meet today to discuss a potential ceasefire to the war in Ukraine. Ukraine’s president, Volodymyr Zelenskyy, said he expected a “strong response” from America should Russia reject the proposed deal.
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GBP: Eyeing another growth boost
Friday’s GDP report is another chance for sterling to show it is headed in the right direction. With economic growth rising unexpectedly to 0.4% in December, some banks are now revising their projections up from the current consensus of 0.1% growth in January. As is always the case, there is an element of risk should the data provide an unfortunate surprise.
GBP/USD: the past year
EUR: Euro loses some momentum
The momentum that carried the euro higher over the past few weeks sputtered on Wednesday, as the prospect of a self-perpetuating cycle of tit for tat tariffs grew larger. Regardless, EUR/USD remains almost 6% up compared to two weeks ago and the euro limited the pound’s fightback.
GBP/EUR: the past year
USD: Stagflation fears ease but Fed faces headache
Falling inflation was a reassuring sign that the United States was unlikely to fall into a period of high inflation and low growth. However, this also gives the Federal Reserve a tough choice. Cutting interest rates would be a bold move with tariffs likely to push prices higher, yet fears of an imminent recession are growing, setting the stage for next week’s decision.
EUR/USD: the past year
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