Donald Trump has turned the screw on Canada again. The US president said tariffs on Canadian cars and parts will rise to 50% from the start of next year, adding another layer to a trade dispute that had already deteriorated sharply over the weekend. It was just about the only news with serious currency implications on a quiet day for data, but it matters because the US and Canadian economies are joined at the hip and a rise in tariffs on car parts, raw materials and finished goods risks raising inflation on both sides, rather than leaving the damage neatly contained in Canada.
Markets have so far resisted the temptation to panic. The US dollar recovered a little against both sterling and the euro on Monday, but it remains close to recent multi-month lows. Investors are still wrestling with worries over the cost of American government borrowing and the Treasury’s decision to step up support for the bond market. However, coming up tomorrow we have the Personal Consumption Expenditures (PCE) price index, a crucial inflation metric for Federal Reserve planning.
It all makes this week’s central bankers gathering in Jackson Hole especially interesting. Chair Kevin Warsh is due to deliver his first keynote on Friday. Markets want to know how he views interest rates, but also whether he can reassure investors over the Fed’s independence at a time when Washington is taking an increasingly active role in markets.
While one index, the Chicago Fed National Activity Index (CFNAI), suggested that the American economy shrank in July, there were reports that the British economy is doing better than expected. According to the Resolution Foundation think tank, UK productivity has been rising by 1.1% for the past 18 months, based on payroll data and tax returns. During this period official statistics have growth at 0.2%.
Also in business news in Britain, it’s been reported that the Treasury is bringing in more expertise to decide if the hospitality industry is being unfairly taxed. It follows Andy Burnham’s new focus on reviving town centres and cutting business rates for pubs and some other venues.
GBP: Slow start to the week for sterling
Sterling essentially traded sideways on Monday against both the euro and US dollar. So it remains close to its recent highs against the US dollar, unable to find the momentum for another decisive push. The domestic picture is looking better. Britain’s services sector strengthened in August and GDP may be better than expected, but an unexpected government budget deficit in July has reminded markets that the public finances remain uncomfortable, as we get into the starting blocks for another pivotal UK Autumn Budget.GBP/USD: the past year
EUR: Orders offer eurozone some encouragement
The euro slipped modestly against the US dollar on Monday, while gaining strongly on a Canadian dollar with obvious problems of its own. Recent economic data has given investors something more constructive to work with. Eurozone business activity grew at its fastest pace this year in August. New orders increased particularly strongly and exports returned to growth, suggesting the region is handling the latest geopolitical disruption better than many had feared. Encouragingly for the European Central Bank, those gains arrived alongside signs that price pressures are easing. Today we'll see if Germany's Ifo Business Climate reading has any optimism in it, before the turn of German consumers in the GfK Consumer Confidence reading tomorrow.GBP/EUR: the past year
USD: Dollar steadies but doubts linger
The dollar found some support on Monday, recovering a fraction against both the pound and euro. Zoom out, though, and it remains close to its weakest levels in several months. The bigger problem is no longer simply the direction of US interest rates. Investors are also asking questions about government borrowing, Treasury intervention and whether the Fed can stay convincingly independent. Friday’s Jackson Hole speech therefore carries unusual weight. Before then, markets will be watching Washington for any further trade or sanctions surprises and the PCE inflation reading tomorrow.USD/GBP: the past year
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