10 February 2025

USD

The US Dollar continues to be influenced by recent US policies. In his fourth week, President Trump is expected to introduce a 25% import tax on all steel and aluminium imports. Whilst onboard Air Force One, he also stated that reciprocal tariffs will be introduced to match tariffs imposed by other countries on US goods.

This is expected to boost demand for the dollar as a ‘safe haven’ currency as the markets respond to Trump's policy shifts and assess the impact on the global economy. This follows on from last week’s increased volatility with the Greenback as Trump announced trade tariffs for Canada and Mexico and then moved the date of their launch by one month. 

Upbeat wage data on Friday has also given the USD some strength. Wages rose 0.5% month-on-month and 4.1% year-on-year, indicating that businesses are still competing for workers despite the lower than anticipated 143,000 created jobs versus the forecast of 169,000.

With over a month to go until the next decision on interest rates in the US on March 19th, this release consolidates early expectations of a hold to interest rates by the Federal Reserve at their second meeting of the year. With unemployment holding steady around the 4% mark (4.1% in Friday's release) the bank are likely to be satisfied that there is still room in the labour market and monetary policy should not be eased too quickly in an attempt to stimulate short term spending.  Inflation is of course the key here for the FED and US CPI and PPI release later this week will be key for the USDs next move. December's headline CPI figure for the States came in at 2.9%, broadly in line with the anticipated 2.85% figure for January. If this release goes ahead as anticipated, it could signal that the disinflation process in the US is on track adding further fuel to the FEDs argument to pause on changes to interest rates. US PPI data will follow and is expected at 0.2%. January retail sales will finish this week’s data from across the Atlantic.

Concerns over a potential trade war with China continue to grow and have the potential for impacts globally. If uncertainty increases, it is possible that we will see a flight to safer assets, which has the potential to strengthen the USD further. 

GBP

Although movement has been quick as the markets react to Trump’s policy announcements, GBP/USD has been hovering at the 1.24 interbank level. The UK is viewed as a potential trade ally as it is so far avoiding Trump’s tariffs, currently benefitting the Pound. How long will this last with the EU also applying pressure on the UK to stand in their corner if Trump’s tariffs begin to encompass the bloc? This is a complex situation that should be monitored, particularly following on from the Bank of England’s adjusted outlook for UK growth.

The Bank of England cut interest rates last week to an 18-month low of 4.5%, which was widely expected given price rises in the have UK continued to slow and left the GBP losing value. This comes despite expectations of an increase to inflation later this year to around 3.7% as consumers navigate a higher energy price cap, increased travel expenses and a rise in water bills. The belief is that this price rise will be temporary or an “upward blip” according to Huw Pill, the Bank of England’s chief economist. The BoE Governor Andrew Bailey will speak later this week and his words will be followed closely after last week’s interest rates announcement. 

The economic outlook from the BoE is bleak, with expected UK economic growth halved to 0.75% after it has been flatlining since March 2024. Reduced demand and both the confidence of business and consumers after Rachel Reeve’s budget appear to be having an impact as caution around spending creeps in. The GDP release on Thursday will providing some interesting insight here and is expected to sit at 0.1% for December.

EUR

The Euro has struggled to have an impact on the markets in recent weeks as the USD has dominated given its safe-haven status. Increased uncertainty around Donald Trump’s next policy move has also been part of this story, particularly with the overhanging threat of trade tariffs being introduced to EU exports to the US, which the US President now appears to be following through with. Under pressure from the US Dollar, the Euro has had some respite from improved export figures in Germany, Europe’s largest economy, at the end of last week

Furthermore, we do see some encouragement this morning for the single currency as the Sentix Investor confidence report shows that investor morale in the EU is at is at its highest since July 2024. Expectations of continued improvement in Germany has added some positive momentum here as we begin the week. EU GDP will be released on Friday and is the main event this week, with expected figure of 0.9% growth year-on-year.

Views expressed in this commentary are those of the author, and may differ from your appointed Moneycorp representative. This commentary does not constitute financial advice. All rates are sourced from Bloomberg and forecasts are taken from Forex Factory.