The USD has heavily weakened this week, as concerns over the state of the US economy outweighed any fears over the global growth implications of Trump’s confirmed trade tariffs.
Ordinarily, the enforcement of Trump’s trade levies should be propping up the dollar, but market participants appear to be focusing more on the impact of these restrictions on the US economy than the global one. Markets are now bracing for a possible contraction in activity in the first quarter after a key US GDP indicator fell into negative territory late-last week - partly a consequence of the Republican DOGE efforts intended to reduce waste in the US government. Investors are now betting that the Fed will need to cut rates more aggressively this year (around 3 cuts now being priced in for this year) to help stimulate the economy, which has made the USD less attractive.
The relatively restrained retaliatory responses from China and Canada so far may also provide another reason why the USD hasn’t been bought back following the confirmation of these trade tariffs. Authorities there appear keen to avoid an escalation in the tit for tat tariffs that would trigger a full-blown trade war. This may keep alive the possibility for some fresh negotiations and, consequently, a potential dilution of these tariffs later down the line.
As a result, the GBP/USD has risen nearly 3-cents this week and currently trades around the highest levels since mid-November. The EUR/USD has moved over 3-cents higher this week and also trades close to a 4-month high. The GBP/EUR is down around 1% this week – sitting at a 2-week low – as traders buy more heavily into the Euro than Sterling. The next bits of data are this afternoon’s US PMI figures and Friday’s EU GDP data and key US payrolls report.
