GBP

Cable is on track for a third straight monthly advance in April, its best run since the third quarter of last year, with the quid in fact set for its biggest one-month advance since November 2023. While gains have fizzled a little of late, as the pound has pulled back beneath the 1.34 mark, spot continues to trade at its best levels since last summer.

That advance, however, has come primarily by virtue of a substantially weaker dollar. As if to evidence this, GBP/EUR is on track to notch a second straight monthly decline in April, its first run of back-to-back declines in 18 months.

Of course, focus more broadly for market participants over the last month has fallen squarely on the issue of tariffs, after the levies announced on ʻLiberation Day’ by President Trump. More on those tariffs is mentioned in the ʻUSD’ section later on, however relatively speaking the UK economy got off rather lightly, facing ʻonly’ a 10% levy on goods imported by the US, and with talks on a potential UK-US trade deal seemingly making further progress than those between other nations.

Nevertheless, even this 10% tariff will still pose a significant headwind to UK exporters, especially with the Trump Admin having expressed little desire to reduce tariffs further, even in the event of a deal being struck. Consequently, it is perhaps unsurprising that the Bank of England have become increasingly jittery over the domestic economic outlook, with Governor Bailey having recently signalled an increasing focus on downside growth risks, and a preparedness to look-through any temporary spike in inflation over the summer. Consequently, another 25bp Bank Rate cut on 8th May seems nailed on, along with a dovish tweak to the ʻOld Lady’s’ policy guidance, opening the door to consecutive rate cuts over the summer.

This dovish shift from the MPC has been enabled by inflation having evolved in cooler fashion than policymakers had expected. Headline CPI unexpectedly fell to 2.6% YoY in March, while the closely watched services CPI metric slipped to 4.7% YoY, also below the MPC’s expectations.

That said, it remains too soon to sound the ʻall clear’ when it comes to the risk of inflation persistence within the UK economy. Firstly, earnings growth continues to run at a pace close to 6% YoY, a rate that is clearly incompatible with a sustainable return to the 2% inflation target. Secondly, price pressures are likely to intensify once more in both the second and third quarters, as a whole host of annual bill increases feed into the metrics, and as businesses pass on increased labour costs – due to the National Insurance changes – in the form of higher consumer prices.

While one would ordinarily argue that a more dovish BoE outlook should lead to headwinds for the currency, this may not prove to be the case in the ʻhere and now’, as the FX market continues to take its cue from the whimsical and ever-changing nature of US trade and economic policy.

EUR

The common currency is on track for its best month since November 2022, having added well over 5% against the greenback in April, briefly trading north of $1.15, as the common currency climbed to its strongest levels since the tail end of 2021.

In keeping with the earlier-mentioned gains in the GBP, this move owes considerably more to broad-based USD weakness, than it does to any miraculous positivity about the state of the eurozone economy.

In fact, downside risks facing the eurozone economy have continued to mount over the last month or so, given the various tariffs on autos, steel, aluminium, and the ʻreciprocal’ levies imposed by the United States. This ʻreciprocal’ tariff, set at 20%, has been reduced to 10% for a 90-day period, however this 3-month pause has only served to embed an elevated degree of uncertainty, given both the slim probability of a comprehensive trade agreement being reached over this period, and the huge degree of uncertainty over whether or not the ʻreciprocal’ tariffs are restored to their ʻLiberation Day’ levels in the event of deals not being struck.

In any case, amid this elevated degree of uncertainty, the ECB have continued to ease policy, delivering another 25bp cut in April.

Said rate cut marks the seventh such move from the ECB this cycle and comes as the risks of a sustained undershoot of the 2% inflation target continue to mount, and as downside growth risks also continue to grow. In a nod towards both factors, the ECB notably tweaked their forward guidance, removing reference to policy being “restrictive”, while also noting that the market’s response to Trump’s tariffs is likely to have a ʻtightening impact’, in turn likely necessitating a faster, and deeper, easing cycle from the ECB.

Naturally, the policy outlook will remain sharply in focus over the course of the coming months, particularly as the detrimental economic impacts of tariffs become increasingly clear. April’s ʻflash’ PMI surveys gave a hint of what may be to come on this front, with the services metric unexpectedly falling back into contractionary territory, while the composite output gauge fell to a 4-month low of 50.1.

In addition to those downside growth risks crystallising as the month progresses, participants will also pay considerable attention to developments on the geopolitical front, as progress towards a Russia-Ukraine peace agreement, or ceasefire, remains painfully slow. At this stage, though, especially given ongoing trade uncertainty, any upside caused by achievement of such an agreement will likely be short-lived.

USD

The greenback has endured a torrid April, being set for a decline of almost 5% against a basket of peers, and marking the fourth losing month out of four this year. These declines, subsequently, took the dollar to its lowest levels since the beginning of 2022, as the DXY tumbled well under the 100 handle.In addition to those downside growth risks crystallising as the month progresses, participants will also pay considerable attention to developments on the geopolitical front, as progress towards a Russia-Ukraine peace agreement, or ceasefire, remains painfully slow. At this stage, though, especially given ongoing trade uncertainty, any upside caused by achievement of such an agreement will likely be short-lived.

These dollar declines have come for a whole host of reasons, though all can be traced back to ʻLiberation Day’ on 2nd April, when President Trump unveiled ʻreciprocal’ tariffs on all imports into the US which were considerably greater in magnitude than market participants had been expecting.

Subsequently, while ʻreciprocal’ levies on most trading partners have been paused for 90 days, a trade war has now broken out between the US and China, with each nation imposing import duties of well over 100% on the other, leading to an effective trade embargo now being in place between the two nations. Add to this, the various other tariffs that have been imposed, such as the various sectoral specific measures, and the ever-present ʻTruth Social’ posts from the President, and one rather rapidly builds a picture of general incoherence, uncertainty, and volatility in the way that policy is presently being made.

This, along with Trump’s renewed attacks on Fed Chair Powell, and threats to ʻterminate’ him, has served to significantly erode the institutional credibility of the United States, and turn US assets from being the obvious place to seek shelter, to the place that all investors are trying to flee from. This ʻsell America’ theme is well evidenced by the disconnect that has emerged between the dollar, and benchmark Treasury yields.

On the subject of the Fed, the FOMC are almost certain to hold the fed funds rate steady this month, with participants preferring a ʻwait and see’ approach, as the US economy grapples with upside inflation risks stemming from the tariffs that have been imposed, along with substantial downside growth risks from those very same policies. The narrative of ʻstagflation’ is likely to build further over the next month or so.

Such a narrative will likely be further strengthened by a softening in economic data as we move further into the second quarter.

While consumer and business confidence has already plunged, and market sentiment also shaken significantly, ʻhard’ economic data has thus far held up relatively well. That though, is unlikely to be the case for long, as supply chains seize up by virtue of the protectionist trade measures that have been taken. In turn, this is likely to result in an increase in layoffs, as well as a rise in prices, as firms pass the additional costs of tariffs onto consumers, in turn resulting in a broad slowdown in consumer spending, thus posing a further headwind to growth more broadly.