Pound-to-Euro Exchange Rate Drops Sub-1.16 on Trade Tension Turmoil

Above: U.S. President Trump says he is still talking to China on matters of trade, news that eased market tensions overnight. Image (C) The White House.

- Euro surprise winner of global trade tensions

- Market rout on Thursday ensures GBP/EUR suffers 4 consecutive days of falls

- Could UK GDP stem the losses?

Pound Sterling found itself caught in the cross-fire of a major market sell-off that struck late Thursday as investors took money off the table on fears the U.S. and China were heading for an all-out trade war.

The Euro was the surprise winner amidst a market rout of stocks and the U.S. Dollar.

Global investors have been shaken by the U.S. decision to proceed with plans to increase the tariff rate on $200BN of Chinese imports from 10% to 25%.

Markets had been rallying over recent months on the view that a trade deal would be struck between the U.S. and China that would prevent the tariffs being enacted, however accusations that China had backtracked on previous commitments saw the U.S. decide to proceed with tariffs.

Beijing has vowed to retaliated but has not yet announced any measures.

A trade war between the world's two largest economies would have serious consequences for global growth, and it is therefore little wonder markets have responded negatively to the escalation.

The move higher by the Euro was unexpected to us as we expected the Dollar - which is considered a 'safe haven' - to rally amidst the market stress. In the event, the Dollar fell and the Euro rose across the board, leaving the Pound effectively stuck in the middle.

The rising Euro took its toll on the Pound-to-Euro exchange rate which broke below 1.16 and fell towards 1.1556, before paring losses to quote at 1.1581 on Friday morning.

If the GBP/EUR exchange rate closes Friday in the red it will have suffered five consecutive days of losses from the high at 1.1776 achieved at the start of the week.

"GBP was down only slightly during much of the week, but fell more sharply on Thursday," says Marshall Gittler, a foreign exchange strategist with ACLS Global. While Brexit has understandably been the central focus for Sterling traders over the course of the week, a lull in Brexit headlines left the currency exposed to global factors.

Looking ahead, it appears that China and the U.S. still both want to reach a trade deal and we note both sides are heavily incentivised to do so with President Donald Trump saying it is still possible to get a trade deal with China this week.

Trump sought to ease investor concerns by saying that he had received a “beautiful letter” from Chinese President Xi Jinping this week, in which the Chinese president urged the two countries to “work together” to resolve their dispute.

The constructive comments explain why we are seeing markets recover somewhat and the Euro give back some of yesterday's advances against the Dollar and Pound Sterling on Friday morning.

We expect easing tensions on this front to allow for a potential recovery in the Pound over the course of the day, particularly if no negative Brexit headlines hit the newswires.

The move lower by the Pound does also appear to be overextended in the short-term following the four consecutive days of weakness; momentum studies are becoming a little oversold, suggesting the downside is potentially limited in the short-term.

Those wanting a stronger Pound ahead of the weekend will be hoping a raft of domestic UK data due for release on Friday morning comes in strong.

GDP data is out at 09:30 B.S.T. and markets are expecting a relatively robust reading of 0.5% to be printed for the first-quarter.

A beat of this figure could well signal to markets the UK economy is in a stronger-than-assumed position given the endless barrage of negative Brexit headlines.

If the figure comes in lower we would however be wary the sell-off in the currency we have seen over recent days extends into the weekend.

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