GBP: Case for GBP Underperformance Through Tariff Vol is Building
Apr-04 09:44
GBP/USD's reversal off yesterday's highs has been fierce: having rallied over 200 pips intraday Thursday, the price has reversed to drop near 250 pips off 1.3207, while EUR/GBP has rallied over 1% on the week.
- The case for GBP underperformance through tariff uncertainty is building: EUR rallied on recent reports that both France and Germany are heavily in favour of sharp countermeasures to protect the domestic economy and businesses against US tariffs. The 20% tariff detailed on Wednesday is likely sufficient to trigger the most sizeable EU response - something the market will likely take at face value given the surprisingly activist German debt brake reform and EU ReARM proposals this year.
- GBP does not stand to benefit from equivalent action given they face the lowest 10% levy. Starmer's government see retaliatory actions as a "last resort", suggesting inflationary pressure from UK countermeasures is low relative to the EU, and the argument for greater government support for businesses is more contained.
- This leaves BoE pricing less exposed vs. the ECB to a correction off this week's lows (3x25bps cuts are now fully priced) - which should in turn favour EUR/GBP.
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FOREX: Landscape Change for Euro, EURUSD Surges Above 1.0700
Mar-05 09:40
- Both legs of the EURUSD trade have been working in favour of strength this week, exacerbating the topside momentum for the pair. Yesterday’s technical break of 1.0533 was significant, and the subsequent headlines surrounding the German debt brake have amplified the bullish conditions from a fundamental perspective.
- Analysts continue to flag that developments are moving at a breath-taking pace. Deutsche bank note the biggest and fastest fiscal policy shift in post-unification German history exceeded even their optimistic expectations. Recall that last week DB turned from bearish to neutral on EURUSD, and the latest developments prompt them to shift to an outright bullish view.
- For now, Deutsche go long EURUSD targeting 1.10, noting that that their rate differential models are already up at 1.09. They will be re-assessing their more medium-term dollar views as the newsflow progresses.
- Today’s impressive follow through has seen spot rise to a high of 1.0722, closing in on 1.0728, the Nov 11 high. Above here, technical levels of note reside at 1.0804 (retracement point) and 1.0825, the Nov 7 high.
- Stagflationary concerns in the US also place today’s ISM services PMI in the spotlight, while the ECB and NFP provide additional event risk for EURUSD, keeping elevated attention on this week’s breakout.
EU: Euronews-Ukraine Aid Back In Draft EUCO Conclusions
Mar-05 09:35
Ahead of the special European Council summit taking place on Thursday 6 March, Jorge Liboreiro at Euronews posts on X: "EUCO latest: The Kaja Kallas plan is back in the draft conclusions, after being removed. “The European Council calls on the Council to advance work swiftly on initiatives, notably that of the High Representative, to coordinate increased EU military support to Ukraine"." Previous reports had suggested that the EUR20B package of emergency aid for Ukraine had been left out of the draft conclusions due to objections from Hungarian PM Viktor Orbán.
- Comes after Rikard Jozwiak at RFE/RL reported on 3 March that "one more line has now been added in the last EU summit draft: - peace must respect Ukraine’s independence, sovereignty and territorial integrity.", adding this morning "at the moment it looks like Hungary might opt out of the Ukraine part of the EU summit (6 March) conclusions".
- It remains to be seen what stance Hungary will take; whether Orbán sides with the rest of the EU or follows the precedent set in late 2023. During that EUCO, Orbán left the room 'for a coffee' at the suggestion of German Chancellor Olaf Scholz, allowing for a unanimous vote within the Council.
- In the wake of US President Donald Trump's pause on military aid to Ukraine, the EU's provision of a EUR20B package is seen as an important signal to Kyiv (and Moscow) of Brussels' intention to maintain its posture vis-a-vis the war.
MNI: UK FINAL FEB SERVICES PMI 51.0 (FLASH: 51.1); JAN 50.8
Mar-05 09:30
- MNI: UK FINAL FEB SERVICES PMI 51.0 (FLASH: 51.1); JAN 50.8
- MNI: UK FINAL FEB COMPOSITE PMI 50.5 (FLASH: 50.5); JAN 50.6
