Dollar on the front foot
The dollar gained ground generally yesterday and remains on the front foot this morning. Trump has delivered his latest tariff missive, slapping 35% on relevant goods imports from Canada, up from 25% currently, even as intensive trade negotiations continue between the two sides. The EU has not yet received a ‘love letter’ informing it of the ‘reciprocal’ tariff that will apply, but will do “soon” according to Trump. Meanwhile, GDP data released in the UK a short while ago shows the economy contracted for a second month in a row in May. The euro is trading at around $1.1680 against the dollar, not much above yesterday’s lows of about $1.1660. The pound is re-testing yesterday’s lows against the US currency, trading at $1.3550, and has slipped to £0.8630 against the euro (from £0.86 just before the release of the GDP data).
Equity markets have taken a sanguine view of Trump’s ‘reciprocal’ tariffs 2.0, even though they’re very similar to those announced on Liberation Day, April 2. The latter caused mayhem in markets before Trump climbed down a week later and pressed the pause button, so perhaps markets are expecting a similar sort of retreat this time around. In any case, both the S&P 500 and Nasdaq closed at new record highs yesterday, although gains were modest, while European stocks were flat having advanced strongly on Tuesday. It was relatively quiet in bond markets with US and German yields a touch higher and UK yields flat.
The UK economy contracted for a second consecutive month in May with GDP dipping by 0.1%, following a 0.3% decline in April, as falling output in manufacturing and construction more than offset a modest increase in services sector output. On an annual basis GDP growth slowed to 0.7% in May, from 1.1% in April and 1.3% in the first quarter of the year. While the Bank of England won’t be too surprised by the latest data – it expected growth to slow in Q2 – they do keep it on track to cut interest rates next month.
It’s very quiet for the rest of the day in terms of economic data, with nothing of note due for release. We do have a few ECB/Fed members scheduled to speak over the course of the day