10 April 2025: The UK may turn to Europe as America becomes more challenging to deal with

The “game” that President Trump is playing on a global scale could destabilise the entire financial system, according to the latest analysis from the Bank of England’s Financial Policy Committee (FPC), which monitors risks within the UK’s financial system. It said ongoing developments would be monitored closely as borrowers reliant on markets were threatened.

“A major shift in the nature and predictability of global trading arrangements could harm financial stability by depressing growth,” Bank officials said.

“A further risk was a reduction in cooperation in tackling global challenges and shocks, which could reduce the resilience of the financial system.”

“As the UK is an open economy with a large financial sector, global risks are particularly relevant to UK financial stability,” they added.

The Government is currently trying to formulate plans to try to limit the effect of the measures announced by the U.S. President last week and amended yesterday. The Prime Minister has said that striking an economic deal with the US or securing lowered American tariff rates for the UK will not be “enough” for Britain, Sir Keir Starmer has warned amid an escalating trade war between Washington and China.

The announcement of further changes to the measures that came from Washington yesterday means that the UK will now pay a 10% tariff on all exports to the U.S., the same as most other nations.

It is now impossible to plan when it is unclear whether the tariff will remain in place indefinitely or will be subject to further changes.

Ministers, including Chancellor Rachel Reeves, have suggested the UK must look elsewhere to improve relations with other countries aside from the US, including the EU, as uncertainty reigns over the US president’s trade policy.

The leader of the opposition has said that she feels that the Government should now look to the advantages that Brexit brought, although she, too, is not averse to looking to the country’s closest neighbour to build a closer trading partnership.

With the local council elections less than a month away, each of the main political parties will be conscious that voters will be looking farther afield than their local services when casting their votes. Nigel Farage and his Reform UK Party have been curiously quiet over the past week, leaving voters unsure if its leader still slavishly supports Donald Trump and his MAGA policies.

Tomorrow will see the release of the monthly growth data. It is expected to show that the economy grew by 0.1% after a fall of 0.1% previously. While that will mark a marginal improvement, the economy is still not delivering the measures that were expected.

The pound saw further volatility yesterday, as it initially fell to a low of 1.2750, but it recovered following the announcement from Washington and closed at 1.2837.

President Trump announced changes to his tariff regime yesterday as he lowered the rate he is going to charge universally to 10%, other than to China, on which he increased the levy to 125%

Trump is edging closer to revealing his true motive for the disruption he has brought to global markets recently. Investors had been surprised that Trump was prepared to take a sledgehammer to global trade, which by and large worked well for the U.S. despite Trump’s comments. His announcement of global reforms to the United States’ trading terms is now seen as pure bluster when the real target was China.

Trump will have lost some degree of credibility having said that he was fully committed to his tariff regime, only to step back from the brink yesterday. Officials had originally derided news that the president was even considering the 90-day pause, which was announced later in the day.

But now, the higher tariffs have been paused with a few notable exceptions. The changes to the world order are on hold, and Liberation Day is postponed. The White House has said that going big on tariffs and then hitting the pause button before entering negotiations with individual countries was the plan all along.

Another of Trump’s “Puppet Cabinet”, Treasury Secretary Scott Bessent, told reporters that seventy-five countries had been in contact to try to negotiate and after today, there will be more. It may well be that it was indeed the plan all along to shock global markets, but the scale of that shock may have come as a surprise.

The news leaves the Federal Reserve in an even more difficult position. Trying to maintain a stable monetary policy stance while the goalposts are constantly being moved leaves Jerome Powell and his colleagues on the FOMC with little choice but to remain on the sidelines, observing what will come next.

Given Trump’s continued haranguing of the Fed, Powell is unlikely to be privy to the ever-changing policy landscape.

It is hard to say where yesterday's announcement leaves the markets. Do they trust that tariffs are “on the back burner” for now, or will there be more changes a little further down the road?

Back in the real world, the latest inflation data will be published later today. The CPI is expected to have fallen from 2.8% in February to 2.6% in March, although the data will not include any effect of what has happened over the past two weeks.

The dollar index lost most of the gains it had made over the past few days following the announcement of the relaxing of the majority of the tariffs. It reached a low of 101.94 but recovered to close at 103.00.

While the Eurozone may well have been relieved at the announcement that the tariff on exports to the U.S. has been cut from 25% to 10%, the uncertainty for markets will remain.

However, this may well galvanize the ECB into advancing plans to break away completely from any reliance on the American or Chinese payment platforms, which both Christine Lagarde and Philip Lane have said recently are a threat to Europe’s financial independence.

Following the Greek Central Bank Governor's remarks regarding the effect of tariffs on inflation, ECB Board member Isabel Schnabel clarified the situation yesterday, commenting that growth would be the most immediately affected and, in the longer term, inflation would likely fall less quickly.

Schnable, speaking before yesterday’s announcement, said that far from being liberating, Liberation Day may have meant the end of free trade. In light of the wholesale reduction of tariffs announced later, she would possibly have tempered her remarks slightly, but the sentiment remains the same.

Meanwhile, Lagerde reiterated her views on the “bigger picture”. She called for "a payments revolution" that would end Europe's dependence on American and Chinese platforms such as Visa, Mastercard, PayPal and Alipay. Lagarde emphasized Europe's dependence on foreign digital payment infrastructure.

"Visa, MasterCard, PayPal and Alipay are controlled by American or Chinese companies. We must make sure that there is a European offer," the European Central Bank President emphasized.

Lagarde emphasized that Europe must create its own alternative to ensure financial sovereignty, which she called a "march towards independence."

Until the fog created by Trump's continual changes to economic policy clears, the ECB will have to “plough its furrow”, dealing with the situation as it presents itself. It is expected to cut interest rates at its meeting next week as inflation continues to wane and the economy requires the boost that a further loosening of monetary policy will bring.

The euro fell, following yesterday's announcement from Washington. It had earlier reached a high of 1.11 but fell back to close at 1.0986.

Have a great day!