Global Trade War Continues
- Mar 10
- 3 min read
GBP :Â Pound Sterling drops as BoE Mann supports swift policy-easing cycle
In her speech on Thursday, Catherine Mann, a member of the Bank of England's (BoE) Monetary Policy Committee (MPC), refuted the majority of BoE officials' recommendations for a "gradual and cautious" monetary policy easing approach at the February monetary policy meeting and in her testimony before Parliament's treasury committee on Wednesday. As a result of the increased global economic volatility, the GBP underperformed its peers at the beginning of the week. In the face of severe global market volatility, Mann advocated against the modest monetary expansion approach. Additionally, she stated that the fundamental tenet of a gradualist monetary policy approach is "no longer valid" because of "substantial volatility" originating from financial markets, particularly from "cross-border spillovers."Â
Four BoE officials, including Governor Andrew Bailey, supported a gradual approach to "removing monetary policy restrictiveness" the day before Mann's speech because they believe that inflation will not go away "on its own accord." It's important to note that Catherine Mann was one of two BoE officials who supported a 50 basis point (bps) rate drop, which was higher than normal, in the February interest rate decision.Â
EUR :Â Handling the political environment
Following a 4.4% spike this week, the EUR/USD is consolidating, marking its largest gain since the early stages of the Covid epidemic in March 2020. FX volatility is expected to be driven by divergent US and European storylines, as was mentioned on Friday. Focus shifts to Friedrich Merz, the leader of the German CDU, and his attempts to gain support for the €500 billion infrastructure fund, in addition to this week's peace negotiations in Saudi Arabia. With a possible Bundestag vote on March 18 and Bundesrat approval on March 21, negotiations with the Greens are still under progress. Euro volatility could be triggered by any stories about the Greens' position.
Regarding data, the March Sentix Investor Confidence poll is released today. Speakers from the European Central Bank take center stage as there isn't much else scheduled. Although markets continue to price in 17 basis points of reduction for that meeting, the majority view base case is that the ECB will suspend its easing cycle in April. A press debate between ECB doves and hawks is anticipated, beginning at 13:00 GMT today with a statement by the hawkish Joachim Nagel. According to the general view, EUR/USD will likely consolidate in the $1.0770–$1.0850 range early in the week, with real progress in Saudi Arabia or ECB commentary—rather than US macro developments—probably determining another surge higher.
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USD : Dollar may have hit a short-term low
Following a turbulent week, which was mostly caused by events in Europe and a steep decline in US short-dated rates, FX markets are again stabilising. In just over a month, the Fed's terminal rate has dropped 50 basis points; nevertheless, additional drops might necessitate a bad JOLTS report on Tuesday or a jump in unemployment claims on Thursday. The market's 27bp price for a June rate drop may be challenged by Fed Chair Powell's Friday comments, which dismissed recent sentiment data and reaffirmed that the Fed is not in a rush to lower rates. On Wednesday, the February CPI is predicted to show persistent core inflation of 0.3% m/m.
Beyond US data, attention turns to the global trade war and the peace negotiations in Saudi Arabia for Ukraine. US steel and aluminum tariffs go into force on Wednesday, as China put retaliatory duties on US agriculture. With concerns over China's willingness to accept a declining Renminbi, the market is also keeping an eye on USD/CNH. Although authorities are unlikely to permit a large amount of depreciation, USD/CNH may yet hit Â¥7.3000. After the volatility of the previous week, DXY might level off, but if Europe's view continues to be positive, selling interest might resume at 104.30/50.Â
