ExchangeRates.org.uk - Trade talk dominated on Tuesday with the Euro and Pound gaining some immediate protection on relief that they were not included in Trump’s latest rhetoric.The Pound to Dollar (USD) exchange rate settled just above 1.2550.
According to Scotiabank (TSX:BNS); “The pound is testing short-term trend resistance (1.2583) at writing but likely needs to clear recent minor highs at 1.2615 to signal more gains towards 1.2710/15.”
The Pound to Euro (GBP/EUR) exchange rate little changed around 1.1970 and still below 1.2000, but Sterling did strengthen against the Canadian, Australian and New Zealand currencies.
Tariffs was the main talking point on Tuesday following the latest rhetoric from President-elect Trump.
According to Trump, he will impose tariffs of 25% on imports from Mexico and Canada on the first day of his administration unless there is clear action to prevent drugs and illegal immigration through the borders.
He also plans to impose 10% on tariffs from China.
There was some relief for the Euro and yen given the lack of immediate threat to impose tariffs on the Euro-Zone or Japan.
There was also no mention of the UK which helped protect the Pound.
Scotiabank noted; “The UK’s limited trade relationship with the US (relative to China, the Eurozone Mexico and Canada) suggest it will be a low priority for the Trump trade team which may allow for some GBP outperformance if tariffs are deployed more broadly in the coming months.”
There was still an important element of uncertainty which should support the dollar.
Scotiabank added; “It should be clear that tariffs will be the big stick that Trump 2.0 walks with and Europe and Japan should not rest too easy.
The USD may edge a little lower in broad terms in the short run but scope for deep or sustained losses look even more limited as tariff risks loom.”
As far as economic data is concerned, US consumer confidence strengthened to 111.7 from a revised 109.6 previously and in line with consensus forecasts, but there was a slide in new home sales to 610,000 for October from 738,000 the previous month and well below expectations of 725,000.
Domestically, the UK CBI retail sales survey deteriorated to -18 for November from -6 previously and compared with consensus forecasts of -14.
Retailers expect an even weaker figure for December which represents the strongest month of the year for retailers and confidence fell at the fastest rate for two years.
According to Ben Jones, Lead CBI Economist; “The last time retailers felt this gloomy was back in November 2022, at the peak of the inflation shock.
This makes the sharp decline in sentiment this month all the more telling.”
MUFG expressed doubts that the UK economy could isolate itself from ECB interest rate cuts; “If euro-zone growth is weak enough to justify that, one could argue that the UK curve should not be as aligned with the US as it is and the impact of such weak growth in the euro-zone would allow for the UK to ease more than is currently priced.”
A key element for markets at the beginning of this week has been a dip in demand for defensive assets.Over the weekend, President Trump nominated Scott Bessent to be Treasury Secretary in the new Administration.
Markets overall considered that the Bessent nomination would lessen financial tail risks and the dollar lost some ground in choppy trading.
Reports that Israel and Lebanon had agreed a ceasefire also triggered a slide in demand for defensive assets with gold under pressure.
The Pound to Dollar (GBP/USD) exchange rate posted a recovery to 1.2615 before settling close to 1.2570, above the 6-month lows just below 1.2500 posted last week.
Scotiabank commented; “Some drift back to the low 1.25s—to fill the overnight gap—may be needed before the GBP can push higher and perhaps see a minor relief rally towards 1.27/1.28.”
There was also an element of Euro short covering and, in this environment, the Pound to Euro (GBP/EUR) exchange rate retreated to 1.1975 with Sterling overall struggling to make headway.
Goldman Sachs (NYSE:GS) remains positive on the Pound; "We still see upside in long sterling expressions versus EUR, where the pound should differentiate itself a bit more on a divergence in domestic prospects including our expectation for growth outperformance and an asymmetric impact from U.S. tariffs."
Although the dollar lost ground, there were doubts whether this would be a turning point for the US currency.
According to Scotiabank; “Bessent, a hedge fund manager with more market-friendly views (pro-growth, hawkish on the Federal deficit, favours gradualist approach to tariffs) is viewed as someone who may be able to temper the president-elect’s more aggressive policy initiatives.
He has also said he wants to preserve the USD’s status as the world’s reserve currency.”
The bank added; “some market participants may want to square up USD longs into the US holiday break this week and the Bessent news is a good excuse to do that.
The USD is unlikely to lose too much ground, particularly because much of the USD’s recent strength has been tied to solid data reports and the resulting adjustment in Fed policy expectations.”
In comments on Monday, Bank of England Deputy Governor Lombardelli repeated her stance from last week’s testimony to the Treasury Select Committee.
According to Lombardelli; “It’s often been said that the last mile may be the hardest, and that’s where we are now.
It’s too early to declare victory on inflation.”
She added; “I view the probabilities of downside and upside risks to inflation as broadly balanced.
But at this point I am more worried about the possible consequences if the upside materialised.”
The German IFO business confidence index dipped to 85.7 for November from 86.5 the previous month and below consensus forecasts of 86.1.
According to the IFO; Sentiment among companies in Germany has become gloomier.
The German economy is floundering.”
Major reservations surrounding the German and French economies are likely to hamper the Euro against majors and on the crosses.
This content was originally published on ExchangeRates.org.uk