Pound V euro: GBP exchange rate trades narrowly as risk of global trade war looms

THE pound is trading within a narrow band against the euro today, with the financial markets also recovering as the perceived risk of a global trade war ebbs.

pound euroGETTY

The pound is trading within a narrow band against the euro today

The pound euro exchange rate steadied on Tuesday morning, limited by a lack of domestic data releases and failing to find continued support from yesterday’s Italian election result.

Sterling had previously seen a jump in demand after US President Donald Trump warned that he was considering slapping a tariff on imported steel and aluminium.

This has prompted EU Commission President Jean-Claude Juncker to respond by threatening a tariff on American brands like Harley-Davidson and Levi Strauss.

The possibility of a trade war between major trading blocs caused many investors to flee the US dollar, the euro and many of the riskier commodity currencies like the Australian dollar.

As of Tuesday, markets have begun to bounce back as fears recede.

Investors are now betting that the EU and China will not risk a protectionist clash with the US.

This is largely because both nations already have a massive trade surplus against the United States.

A retaliatory move against the US would only pose a further threat to their position in the global trade hierarchy.

They make it impossible for our cars (and more) to sell there. Big trade imbalance!

Donald Trump

President Trump said: “If the EU wants to further increase their already massive tariffs and barriers on US companies doing business there, we will simply apply a tax on their cars which freely pour into the US.

“They make it impossible for our cars (and more) to sell there. Big trade imbalance!”

President Trump recently took a step back by using the threat of tariffs on steel and aluminium as leverage towards NAFTA negotiations.

He said that the tariffs will only “come off” if a favourable NAFTA agreement is signed.

This eased investor concerns that a global trade war could be imminent.

For the euro, markets continue to remain bearish.

The Bank of England explains the exchange rate

They care concerned that the Italian election results could see a eurosceptic leader at the helm of the bloc’s third-largest economy, and slightly skittish on a rather disappointing German construction purchasing managers’ index (PMI).

IHS Markit’s PMI reading printed at 52.7 in February, down from the near seven-year high of 59.8 in January, marking the smallest expansion in the construction sector since early last year.

This represents a deceleration from the previous period, with new orders and employment still growing, but at a slower pace than previously.

Nonetheless, any reading over the 50-point mark indicates growth, and construction in Germany has continued to progress with a sustained expansion for the past three years, hence the mild market reaction.

Looking ahead, markets are also moving slightly cautiously before tomorrow’s release of the bloc’s growth figures for Q4 2017.

Eurozone GDP is currently forecast to remain steady at 2.7 per cent (year-on-year) but any reading below this could give the pound euro exchange rate a shot in the arm.

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