Trade War Fears Weigh on both Euro and Pound, but EUR/GBP Exchange Rate May Advance as Sterling Forecast to Come Off Worse
While the recent moves towards protectionism from the US are likely to weigh on both the Euro and Pound Sterling over the coming weeks, the EUR/GBP exchange rate is forecast to advance as Sterling comes off worse.
The Euro has already received a blow recently from fears over trade disputes with the United States after European Central Bank (ECB) President Mario Draghi claimed that US protectionism – as well as financial deregulation – could weaken the world economy, which has strong implications for Eurozone monetary policy.
President Trump yesterday signed into effect the planned 25% tariff on steel imports and 10% tariff on aluminium imports, which are due to take effect in 15 days’ time, although the President has signalled that there would be implications for those who are true friends of the US.
EU officials have already threatened to retaliate against the metal tariffs by taxing imports of US products including Harley-Davidson motorcycles, jeans and peanut butter.
But Trump responded that more tariffs would be levied against imports of EU goods should the bloc retaliate, so markets are anxiously awaiting the European Union’s response, as this could dictate whether a global trade war is likely to break out.
Any signs that the EU will match US protectionism will weigh on the EUR/GBP exchange rate, although it could be that Pound Sterling comes off worse, given that the UK has much more to lose from the United States throwing up trade barriers.
EUR/GBP Forecast to Rise if US Protectionism Fears Weigh on Post-Brexit Trade Outlook for UK
A lean towards protectionism from the US administration is particularly worrying for the UK, given the government’s hopes of strong trading relations with the United States after Brexit, which could give the EUR/GBP exchange rate some support even as trade war fears weigh on the euro as well.
Negotiating a deal with the US has been the key pillar of the post-Brexit plan for many of the strongest advocates of Brexit in the government, with claims from both the Trump administration and Downing Street that it will be a simple matter to secure a free-trade deal between the two nations once the UK has left the European Union.
Markets have long been sceptical over how easily the UK will be able to negotiate a deal with the US, but those fears have been heightened in recent days now that the US looks bent on pursuing Donald Trump’s protectionist agenda.
UK officials have today announced that they will work closely with the European Union, despite the approach of Brexit, to persuade the United States to exempt them from its steel tariffs; success here could boost the Pound more than the Euro, because it would signal that the US still counts the UK as a key ally and may therefore still be open to the idea of a comprehensive free-trade agreement following Brexit.