ExchangeRates.org.uk - On the geopolitical front, markets are having to contend with major news surrounding the war in Ukraine as well as ongoing tensions surrounding US trade tariffs, with further announcements expected on Thursday.Domestically, the GDP data provided initial Pound relief but failed to resolve underlying unease surrounding the UK outlook.
The Pound to Dollar (GBP/USD) exchange rate hit highs just below 1.2520 before a retreat to 1.2475 amid tariff fears.
The Pound to Euro (GBP/EUR) exchange rate traded just below 1.2000 in choppy trading.
Markets expect the Euro to be more vulnerable than the Pound on tariffs.
According to Danske Bank (CSE:DANSKE), “We maintain our bias for a stronger GBP vs EUR.”
UK GDP expanded 0.4% in December compared with consensus forecasts of 0.1%.
For the fourth quarter of 2024, GDP grew 0.1% compared with expectations of a 0.1% decline and the UK avoided a technical recession.
Headline data boosted the Pound, but details within the report were less impressive.
The economy was boosted by a jump in inventories and stronger government spending while the private sector struggled.
ING commented, “The UK economy grew by 0.1% in the final quarter of 2024, though only because of a surge in inventories.
These are a notoriously volatile accounting fixture which, unlike other parts of the GDP breakdown, don't tell us much about the underlying health of the economy.
The areas that do – household consumption, exports, and business investment – were all flat or negative.”
Capital Economics chief UK economist Paul Dales commented, “It’s clear that a lot of the weakness is due to the rise in business taxes announced in October’s Budget as well as soft demand overseas.”
According to BoE Chief Economist Pill, "I would expect we're going to cut Bank Rate further.
But the pace at which you can do it is less."
Geo-political developments will also have a key element on the economy and Bank of England policy.
According to Pill; "If the disruptions to the international trading system weigh on global trend growth or UK potential growth – both of which seem plausible to me – they create a ... difficult trade-off for monetary policy where activity can remain quite sluggish and yet price pressures remain in the system."
In this context, developments surrounding Ukraine and trade tariffs will be monitored very closely within central banks and markets.
Overnight, President Trump announced that he would hold talks with Russian President Putin over securing a deal over Ukraine.
Any moves towards a cease-fire could lessen short-term European fears over energy security, potentially supporting the Euro and the Pound.
MUFG commented, “A deal to end the conflict in Ukraine would help to ease further the geopolitical risk premium priced into regional assets providing support for European currencies.”
Tariffs will also be a key issue, and European currencies dipped ahead of the New York Open following comments from President Trump that; “today is the big one – reciprocal tariffs.”
ING commented, “The prospect of 'reciprocal' tariffs is still hanging over FX markets this week, and apparently, Trump signs his next batch of executive orders at 19CET today.”
This content was originally published on ExchangeRates.org.uk