The threat of a transatlantic trade war has lifted as quickly as it arrived. President Trump confirmed late yesterday that he is withdrawing the threatened 10% tariff on European and UK goods, averting what markets feared would be a damaging economic clash. The abrupt U-turn follows what the President described as a “productive” meeting with NATO Secretary General Mark Rutte, where a “framework” for the Greenland dispute was reportedly agreed.
Investors have wasted no time in pricing out the risk of conflict. Global equity markets are enjoying a spirited relief rally this morning, with the FTSE 100 and major European bourses tracking a sharp recovery on Wall Street. The “panic premium” that had built up in safe-haven assets earlier in the week is evaporating, allowing risk-sensitive currencies to claw back lost ground.
For the UK, the timing is particularly significant. The removal of the trade threat comes just a day after domestic data showed inflation ticking up to 3.4%, a surprise that has forced markets to rethink the Bank of England’s rate path. With the external risk of tariffs now sidelined, the focus has snapped back to these sticky internal price pressures, which suggest interest rates may need to stay higher for longer.
On the continent, the mood is one of palpable relief but lingering caution. While the Eurozone has dodged a bullet regarding export duties, the European Central Bank’s decision to keep interest rates on hold this afternoon came with a sombre assessment of the bloc’s growth. The ECB’s accompanying statement struck a dovish tone, acknowledging that the economy remains fragile despite the reprieve from Washington.
Consequently, the US dollar is on the back foot. The greenback had surged earlier in the week as a safe haven, but those flows are reversing aggressively as the geopolitical temperature cools. Traders are dumping low-yielding government bonds and the dollar in favour of assets that benefit from global stability.
Looking ahead, the market narrative is likely to shift from politics back to fundamentals. With the “Greenland scare” in the rear-view mirror, traders will be scrutinising tomorrow’s PMI data to see if the recent volatility has left any mark on business confidence. For now, however, the overwhelming sentiment is one of relief.
