11 March 2025: Sterling may have topped out after Mann’s comments

The pound’s recent bout of strength has little to do with market confidence that the Prime Minister and his Cabinet are on the right track. More to do with the market’s concerns that the U.S. economy is heading for a downturn due to President Trump’s policies towards Ukraine and Gaza and his threatened imposition of tariffs on goods and raw materials imported from some of his country’s major suppliers.

Since the pound was languishing before Trump’s antics, when they are taken out of the equation, traders are looking at positioning themselves from the short side.

Catherine Mann looks to the market like she has performed a complete reversal of her views on inflation. However, according to her recent speeches, she is simply reacting to the realities of the current situation.

It may be difficult for her to convince her colleagues that the way forward is to abandon gradual, twenty-five basis point cuts (or increases) in interest rates in favour of larger but less common fifty or even one-hundred-point ones which make a statement of intent to the market.

Having reinforced her views yesterday, Sterling may have topped out following its recent rally.

Further influence of the U.S. on the UK economy came yesterday when Trump’s Energy Secretary spoke of his belief that the economic weakness in the UK is caused by its slavish adherence to green policies, which have resulted in higher energy costs and fewer jobs.

This idea was immediately refuted by his UK counterpart, former Labour Leader Ed Miliband, who believes that energy security is paramount to the country’s future.

He went on to announce that homes near electricity pylons, either existing or as part of the country’s new renewables programme, would receive up to two hundred and fifty pounds a year subsidy from the Government. This is to be paid for by a marginal increase for everybody else who does not live near pylons. It is expected that the increase will be in the region of eighty pence per household.

Environmental groups are already planning to protest the increase in the number of pylons, which they consider to be a blight on the countryside. A spokesperson labelled the subsidy as insulting and patronizing, while the critics also accused the Government of trying to “buy off” the public.

Bank of England Governor, Andrew Bailey, speaking at the end of last week, expressed his concerns that the entire global economy will be dragged into facing the effect of Trump’s imposition of tariffs on trade, even those that are not directly involved.

Experts have warned that trade barriers could hurt both the US and other countries’ economies, including the UK.

Mr Bailey told the Treasury Select Committee: “The risks to the UK economy and the world economy are substantial,” while adding: “Trade supports growth.”

Trade barriers pose a substantial risk to both the UK and global economies, according to Mr Bailey's testimony to the Treasury Select Committee. He emphasized that trade is a crucial driver of economic growth, echoing expert warnings that such barriers could negatively impact not only the US but also other countries, including the UK.

The pound retreated from its recent high yesterday, falling to a low of 1.2861 and closing at 1.2878 as the market took stock of recent events.

President Trump is in danger of alienating himself from a group of his supporters, which, while not large, exert major influence over the Economy.

Several titans of industry, particularly in the tech sector, have seen their stock prices tumble as Trump has evoked fears of a recession.

Over the weekend, Trump told reporters that the country’s economy was going through a transition and that could lead to a brief and shallow recession.

Any mention of the “R word” is anathema to economists and analysts who believe that a recession is easier to get into than out of.

Global markets slumped on Monday, with Wall Street logging sharp losses over fears that US President Donald Trump's trade policies could tip the world's biggest economy into a recession.

In the United States, the tech-heavy Nasdaq Composite Index plummeted by 4%, seeing its worst day since 2022 after Trump’s comments.

"There is a period of transition because what we're doing is very big, we're bringing wealth back to America," Trump told Fox News on Sunday.

Since taking office in January, Trump has imposed sweeping tariffs on imports from Canada, Mexico, and China -- before allowing a partial rollback for the two US neighbours.

A new wave threatens to arrive this week, with steep levies of 25% on steel and aluminium imports due to take effect Wednesday.

The Federal Open Market Committee is not expected to cut interest rates after its next meeting on March 19 according to fixed-income markets. The key thing to watch for may be clues on the likelihood of a May interest rate cut.

Currently, markets view a May cut as unlikely, but possible. Statements from FOMC policymakers at the March meeting could move those expectations materially.

Markets currently give just a 3% chance of lower short-term interest rates after the FOMC’s next meeting on March 19. That’s according to the CME FedWatch Tool, which measures the implicit forecasts of fixed-income markets.

The logic for holding rates steady is that “while progress in reducing inflation has been broad-based, recent readings remain somewhat above our 2% objective.” according to Federal Reserve Chair Jerome Powell in a speech he made last Friday.

He added, “Many indicators show that the labour market is solid and broadly balanced.” If inflation is not at the FOMC’s target level and the job market remains robust, then the FOMC may not be inclined to cut rates.

The dollar index stabilised at lower levels after several sessions of severe losses. It reached a low of 103.57 but rebounded to close at 103.97.

Spring appears to have arrived for the Eurozone economy. Ironically, it may be the policies of U.S. President Donald Trump that have kickstarted an economy that required a jolt to encourage policymakers in Brussels to lighten the load that the ECB had been shouldering for a considerable time.

A significant increase in defence spending is on the horizon, as well as a German government that finally recognizes the structural changes that need to be adopted to raise its economy to former heights.

However, there are storm clouds rising in Germany. Germany’s Green Party has threatened to torpedo plans put forward by incoming chancellor Friedrich Merz to invest hundreds of billions of euros in defence and infrastructure.

Merz, whose conservative Christian Democratic Union (CDU) emerged the biggest in February’s legislative elections, wants in particular to relax the strict limits imposed by the “debt brake” in Germany to invest more in defence and security.

His proposal comes as the country’s economy experiences prolonged stagnation and United States President Donald Trump’s direct overtures to Russian President Vladimir Putin have left Europe feeling vulnerable on security.

The proposed constitutional changes to ease strict borrowing limits around defence and establish a 500-billion-euro ($542bn) fund for infrastructure had been described as historic when they were presented last week.

“We will not let this happen, and we will not let Friedrich Merz and Lars Klingbeil [of the Social Democratic Party] abuse a difficult situation in European security,” Franziska Brantner, co-leader of the Green Party, told reporters yesterday.

Germany’s constitutional “debt brake,” which has been the hallmark of Berlin’s fiscal policy since it was introduced by former Chancellor Angela Merkel in 2009, limits new borrowing to 0.35 percent of gross domestic product (GDP).

Merz’s proposal would exempt military spending from that rule – setting no upper limit for “necessary defence spending.”

Eurozone inflation is expected to remain above the European Central Bank's target, escalating concerns around interest rates. Executive Board member Isabel Schnabel has expressed apprehension about long-term consumer price trends.

Schnabel's comments come as the ECB recently reduced its deposit rate by a quarter point, and officials are preparing for difficult discussions regarding future moves. As European nations plan extensive investments in defence and infrastructure, fuelled by government budgets potentially reaching hundreds of billions of euros, the economic landscape is poised for notable change, which could see inflation surge.

The Euro paused for breath yesterday following its recent run of gains. It reached a high of 1.0874 but eased back to close, still higher on the day, at 1.0835.

Have a great day!