10 March 2025

USD

US President Donald Trump has referred to the US economy as being in 'transition' following another week of policy changes and announcements that have brought broader market uncertainty and a subsequent increase in volatility to the currency markets.

The proposed 25% tariffs on imports from both Canada and Mexico into the US were imposed last week, but many goods were exempted within days.  The tariffs imposed on all goods imported from China have also doubled to 20% and have caused retaliation from Beijing, who have introduced new tariffs this week on many US farm products, including chicken, beef, pork, wheat and soybeans. The heightening potential of a trade war appears to contribute to the ripple of uncertainty through markets.

The USD index showed its largest weekly fall since November 2022, which could be another indication of investor nerves, and the pound is currently at its highest value versus the dollar since early November. 

Concerns relate to the US economy's short-to-medium-term health, given that the uncertainty surrounding President Trump's tariff policy is causing a sharp rise in consumer spending, which could lead to an acceleration in inflation. This places an increased focus on the Federal Reserve's upcoming monetary policy meeting on Wednesday 19th March, with the Federal Reserve's Chair, Jerome Powell, stressing the need for patience on interest rate cuts in the midst of increased policy uncertainty.  

However, Powell appeared to be keen to dispel suggestions of concerns around the US economy. He commented that policymakers "do not need to be in a hurry and are well-positioned to wait for greater clarity."

Jobs data on Friday offered an indication of stability and resilience in the employment market, with the non-farm payroll data coming in broadly in line with expectations at 151,000 against the 160,000, forecast by analysts.

The buoyancy of the employment market could also show that there is capacity in the economy and potentially calm some of the concerns of a recession. These fears have sprouted from the risk that inflation could rise off the back of consumers scrabbling to make large purchases ahead of price rises from tariffs. Tuesday's JOLTs job opening data will provide further insight here when it is released at 2pm.

Meanwhile, market expectations are increasing over more interest rate cuts throughout 2025 despite the rhetoric from Jerome Powell. Investors are now pricing in three 0.25% cuts by year-end compared to just a single rate cut priced in at the point of Trump's inauguration in January.

Later this week, the key inflation metrics, consumer and producer price data (CPI & PPI), will be released on Wednesday and Thursday, which may show any early signs of potential accelerated inflation as a consequence of tariff uncertainty.

EUR

The uncertainty surrounding both the US and the UK appears to have allowed the euro to capitalise on its comparative stability, and the single currency is trading strongly versus both the USD and GBP.

Last week, Germany announced a fiscal debt break deal anticipated to add up to 1pc to German GDP through spending on both defence and infrastructure.

Germany's Chancellor in waiting, Friedrich Merz, commented, "The political developments in Europe and the world are evolving faster than we anticipated just a week ago. Germany and Europe must now undertake extraordinary efforts to ensure our defence capabilities."

The European Central Bank (ECB) cut interest rates to 2.5% last week as expected, with monetary policymakers taking a rather hawkish tone to their direction moving forward and signalling that the central bank is nearing the end of its current monetary easing cycle. This may bring more certainty to investors considering investing in the single currency.

This week will be very quiet regarding economic data release across the EU, although ECB President Christine Lagarde and Vice President Luis De Guindos are both scheduled to speak.

GBP

The pound has been under pressure recently, particularly against the euro, as traders sell off their sterling. This profit-taking has led to an increase in supply, pushing the pound to its lowest level against the euro in over a month.

Against the dollar, however, the pound has been slightly more stable, and even gaining some ground, as uncertainty surrounding tariffs in the US is on the rise. As mentioned earlier, GBP is at its highest level since November 2024 against the dollar.

Concerns about the UK economy are also weighing on the pound. Businesses are slowing down hiring as they prepare for the potential impact of government policies, including the National Insurance and minimum wage increases due to come into effect in April. At the same time, a report from KPMG suggests that starting salaries in the UK are falling at their fastest rate in four years, indicating weaker demand for workers.

Chancellor Rachel Reeves’ upcoming Spring Statement on Wednesday 26^th March is also drawing attention as the government looks for ways to fill gaps in its spending plans.

This week, the latest Retails Sales and GDP data will be released on Tuesday and Friday, respectively.

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.