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US trade tariffs fail to knock GBP, EUR

Today’s macro highlights:

  • USD - Non-farm payrolls (May)
  • GBP - Markit UK PMI Manufacturing (May)  

US trade tariffs fail to knock GBP, EUR

Donald Trump launched into a trade war yesterday with an announcement that punitive tariffs would be applied to steel and aluminium imports. A raft of countermeasures has been deployed by Europe and other trade partners, and the longer term perspective here is that if the levies are maintained, it will be bad for the global economy. This could in turn prove to be dollar-positive, but for now the notable downside has been rather more selective with the Canadian Dollar and Mexican Peso both floundering.

In terms of economic news, both UK consumer borrowing and Eurozone inflation came in ahead of expectations yesterday. These prints both support the idea that the ECB and Bank of England can look to tighten monetary policy in the near term, providing a limited degree of support for the Euro and Pound respectively.

The key number to watch on the economic calendar for the day ahead will be the US non-farm payrolls reading, due for release at 1.30pm BST. We have seen a run of softer than expected updates from across the Atlantic this week, and with the market still undecided as to just how aggressive the Federal Reserve will be with regard to interest rate hikes for the remainder of 2018, a shortfall in this number could well prove to be negative for the greenback.

There’s also the Markit PMI Manufacturing reading from the UK due this morning at 9.30am BST. Some modest contraction on last month’s figure is expected, but further evidence that the UK economy isn’t slowing - and that the start of the year was merely impacted by weather rather than falling confidence - would again lend support to the idea that interest rates will rise in August. The Pound looks oversold against both the Euro and the Dollar so anything that supports a more hawkish outlook at the BoE could well lead the currency to rally into the weekend break.   

Cable posted a second successive day of gains during yesterday’s session but upside remains limited and the pair is struggling to break away from its current six month lows. As the market digests both the impact of the proposed, US-driven trade tariffs and potentially the growing prospect of a BoE rate hike in August, further direction could be seen, although the allure of the dollar as a safe haven in times of turmoil may win out.

Wednesday’s gains were extended during yesterday’s session, but the pair failed to sustain a move above 1.17. Progress in the Italian political situation, with the President agreeing to a revised list of senior ministers, may provide some short term support for the common currency. Policy decisions - especially in terms of public sector spending - could however carry the risk of destabilising the common currency.

With another day of losses being chalked up yesterday, the pair does risk seeing its slow grind higher being stubbed out. Any meaningful signal over a UK monetary policy tightening happening faster than we see from the ECB would have the potential to provide some meaningful support, but until this happens, rangebound trading may well prevail.