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ExchangeRates.org.uk - Trump U-Turn on Trade: Risk Appetite Surges, UK Vulnerability Caps Pound Recovery

Risk appetite has surged following President Trump’s U-Turn on reciprocal tariffs.There has, however, already been a big impact on business confidence and the global economy while the US-China trade war has escalated which will inevitably cause further damage.

As far as the UK is concerned, events have demonstrated underlying fragility in the bond market which will also maintain Pound vulnerability.

According to ING; “Clearly, then, the gilt market is an Achilles heel for sterling.”

The Pound to Dollar (GBP/USD) exchange rate has strengthened to 1.2870 amid dollar losses, but remains below Monday’s highs.

According to UoB; “Overall, only a breach of 1.2925 would suggest that GBP is not declining further.”

The Pound to Euro (GBP/EUR) exchange rate has strengthened to 1.1665 from 15-month lows below 1.1550 recorded on Wednesday, but it has retreated from intra-day highs around 1.1735.

According to ING; “We’re a little reluctant to call EUR/GBP quickly back below 0.8500.” (GBP/EUR capped below 1.1765.)

The slide in US bond markets on Wednesday increased fears over a full-scale panic and triggered a U-turn from President Trump.

He announced that the reciprocal tariffs which came in on April 9th would be delayed for 90 days for all countries which had not retaliated against the US.

The 10% baseline tariffs would remain in place on all countries.

It appears that the EU will qualify for the 90-day delay as retaliatory tariffs had been announced, but not implemented.

The other tariffs on cars and car parts will also remain in place.

Equities rallied very strongly with a 9.5% surge in the S&P 500 index.

There was, however, a huge sting in the tail as Trump decided to escalate the US-China trade war with tariffs on China increased further to 125%.

The Chinese stance was uncompromising as it indicated a refusal to back down, intensifying the trade war.

The overall tariff level on US imports will still be at the highest level since the 1930’s and there will still be a substantial dislocation in the global economy.

According to Economist Nouriel Roubini; “The market discipline that forced Trump to blink was not only a bear market in equities but also and more importantly the spike in bond yields and credit spreads (especially HY [high yield debt]) and the risk of a disorderly collapse in the dollar.”

He added; “So Trump blinked and decided for the 90 days tariff pause.

Now the big issue is whether US and China find a way to de-escalate their trade war.”

According to MUFG; “While stagflation risks for the US economy have now reduced, the higher tariff rates still in place and elevated level of policy uncertainty remain a headwind to US and global growth.”

There will also be an impact on the UK economy and markets with a particular focus on the bond market.

On Wednesday, the 30-year gilt yield surged to the highest level since 1998 amid carnage in global markets.

There has been some relief on Thursday with the yield declining to just below 5.40%.

The 10-year gilt yield has also edged lower to 4.68% from 4.75%.

Developments in bond markets will trigger further unease over the UK outlook and potential vulnerability.

ING commented; “That UK gilts even underperformed US Treasuries is quite remarkable and probably very unnerving for the UK’s Debt Management Office.

One view here is that the DMO is already pushing the limits with £300bn of new issuance this year and that any greater slowdown in the UK economy, which would hit revenues/raise welfare spending, would only hit gilts harder.”

There has been a slight adjustment in Bank of England expectations with the chances of a May rate cut close to 80%.

Unicredit (BIT:CRDI) expects a more aggressive Bank of England stance in cutting rates and added on GBP/USD; “any retest of the 1.32 area a selling opportunity.”