Volatility Amid Trade Risks and Economic Uncertainty
GBP
The British Pound saw cautious trading this week as investors assessed the impact of external pressures and ongoing economic challenges.
Tariffs and Trade Risks: Bank of England Deputy Governor Clare Lombardelli highlighted concerns over the potential impact of US trade tariffs on UK growth. While she noted that trade barriers are generally harmful to economic growth, she stated it is too soon to predict their full effects.
Economic Data and Inflation: Recent UK data painted a mixed picture. Retail sales dropped by 0.7% in October, and preliminary PMIs suggested a slight contraction in November’s business activity. On the inflation front, October’s annual rate rose to 2.3%, the highest in six months, exceeding the Bank of England’s 2% target.
Interest Rate Outlook: Markets widely expect the BoE to maintain its current interest rate of 4.75% at the December meeting, as policymakers wait for more evidence of cooling inflation and stabilising wage growth.
While the pound regained some ground near $1.26 after recent lows, uncertainties—ranging from weak economic data to the potential ripple effects of US policies—continue to weigh on sentiment.
Looking ahead, all eyes are on the BoE’s next moves and how external factors may shape the pound’s performance.
EUR
The Euro has steadied amid a relatively quiet data calendar in the eurozone, but concerns over global trade remain. While Europe was not directly mentioned in former US President Donald Trump’s recent tariff proposals, the possibility of future measures targeting the European auto sector or other industries looms large. The renewed focus on tariffs globally adds further bearish pressure on the euro.
Market attention is also on the European Central Bank (ECB) ahead of its 12 December meeting, where policymakers are expected to decide on a rate cut. Opinions are divided between a 25bps and a 50bps reduction, with a slight tilt toward the larger cut. In the meantime, EUR/USD appears likely to remain in a narrow range of 1.0450-1.0550, though the broader trend suggests a move lower.
USD
The US Dollar Index held steady around 106.9 on Wednesday as markets reacted to President-elect Donald Trump’s new tariff threats and awaited key US data.
Trump warned on social media that he could impose 25% tariffs on imports from Canada and Mexico unless they tighten border security and address the flow of illegal drugs, particularly Fentanyl. China was also threatened with a 10% increase on current tariffs. These actions could be enforced through executive orders.
While these tariffs may be part of a bargaining strategy, their impact could still be significant, especially for the Mexican peso (USD/MXN). If tariffs are implemented, the currencies of Mexico and Canada may struggle more than they did during Trump’s first term.
As markets prepare for the end of the year, these tariff threats and stronger US consumer confidence could support the dollar. Additionally, the Federal Reserve’s latest meeting minutes are expected to show a less dovish outlook, which could further boost the greenback.
Overall, the dollar remains stable, with some modest gains against the New Zealand dollar and the Japanese yen. However, uncertainties over tariffs and upcoming data keep the market cautious.
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