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The Euro was a stand-out winner on signs Donald Trump has changed his mind about imposing universal import tariffs.
The threat of stringent U.S. tariffs being placed on an already struggling Eurozone economy now looks overblown following news the incoming U.S. president will only target 'critical' imports.
"The euro, which had been particularly pressured under U.S. tariff threats to the bloc, has seen an even bigger climb against the dollar, helping lift it against the pound to be worth above 83 pence," says W. Brad Bechtel, Global Head of FX, at Jefferies LLC.
EUR/GBP's rise to 0.8314 brings the Pound to Euro conversion rate to 1.2028.
The Washington Post reported Monday that President-elect Trump is considering imposing tariffs on only critical imports from all countries.
"The current discussions centre on imposing tariffs only on certain sectors deemed critical to national or economic security," the newspaper said.
The Dollar had been a major beneficiary of Trump's win in November as markets saw the imposition of universal tariffs as being inflationary for the U.S. while being a headwind to EU and global growth.
Trump campaigned on a platform of imposing a blanket 10-20% tariff on all U.S. imports.
"The Eurozone should be vulnerable in a trade conflict given the region’s reliance on manufacturing (16% of GVA, third-highest in G10)," says a note from JP Morgan.
Exports to the U.S. are 17% of total EU exports, amounting to 3% of the region's GDP.
JP Morgan said the Euro could fall to parity or below against the U.S. Dollar in Q1 as tariff risks get more fully priced.
The flip side is that any reduction in tariff risks eases that downside thesis.
Should any resultant EUR/USD recovery outpace the GBP/USD recovery, then GBP/EUR would mechanically trade lower.
The fall in GBP/EUR brings 1.20 back into contention and sub-1.20 levels will likely be tested before a return to the 2024 highs at 1.2150.
The relief following the latest developments in the tariff saga could yet prove misplaced. Trump's key strategy in pushing his agenda is to create an environment of uncertainty as this allows him to stay on the front foot.
He caught markets by surprise in November when he unexpectedly threatened China, Mexico and Canada with tariffs owing to domestic issues centred on illegal migrant flows and drugs.
These Washington Post reports are not verified and we would imagine numerous shifts lie ahead. This will ensure the Euro's rally will have its limits.
An original version of this article can be viewed at Pound Sterling Live