Yesterday, the pound finished broadly lower following on from that lower inflation number earlier in the morning which saw markets increase odds of a rate cut in May by 80%. From a market perspective, the budget was pretty much a non-event, with very little impact on the pound, but the latest OBR update has downgraded UK GDP this year from 2% to 1%, with a pick up expected in 2026.
Markets were spooked yesterday after Trump signed an order imposing 25% tariffs on auto imports. Later on, he added that large scaled tariffs would be imposed on the EU and Canada, should they work together “to do economic harm” to the US. The threat comes after France urged the European Commission to consider using its toughest trade weapon – the anti-coercion instrument (ACI) – for the first time. The ACI provides a legal framework that allows the EC to adopt response measures against tariffs.
*Daily move - against G10 rates at 7:30am, 27.03.25
** Indicative rates - interbank rates at 7:30am, 27.03.25
Today's focus falls on final GDP and core PCE numbers for the fourth quarter from the US – both unlikely to have a big impact, given these are the third iteration of the same numbers over the same period. Initial jobless claims could cause some moves and we could also to hear from various speakers from the European Central Bank (ECB), Federal Reserve (Fed) and Bank of England (BoE) today.
EUR is marginally weaker this morning with markets increasing the odds of a rate cut in April to 80%, taking into consideration the tariff threats from the US. The EU expects the US to apply double digit tariffs next week.
February’s drop in inflation now keeps a May rate cut in play with some thoughts amongst some economists that the downtrend in inflation will resume in the coming months, allowing the Bank of England to cut rates quarterly. If this is the case then we could see interest rates drop to 3.75% by the end of the year – higher than the market pricing of 4%. This suggests the pound may have further to fall on rate differentials.
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