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U.S. President Donald Trump said the U.S. will raise tariffs on EU imports.
He said a 25% tariff would be "generally" applied because the European Union "was formed to screw the United States."
"We have made a decision and we’ll be announcing it very soon. It’ll be 25 per cent,” he said during a meeting of his cabinet.
However, the President sowed some confusion as he also said the 25% tariff was specific to car imports.
Following the comments, the Pound-to-Euro exchange rate rose to 1.2098, making for a sizeable daily gain of 0.37%.
The Euro fell 0.20% against the Dollar to 1.0489.
A spokesperson for the European Commission responded to Trump's move that it will react strongly and immediately against unjustified obstacles to free and fair trade.
The current subdued mood reflects Trump's comments yesterday that he intends to impose tariffs of 25% on goods from the EU, increasing the risk not only of a bilateral trade war, damaging to both the US and European economies, but also of the broader transatlantic alliance further deteriorating," says Erik Meyersson, an analyst at SEB.
On February 03, Trump said he was "absolutely" going to proceed with EU tariffs. "The EU treat us very bad."
It was at this point that Pound-Euro fist broke through 1.20 as it extended a recovery from its January lows.
The price action serves as confirmation that the threat of EU tariffs is weighing on the Euro against Pound Sterling, which analysts say is relatively better insulated from tariffs owing to the UK's balanced trade in goods with the U.S.
"It will definitely happen with the Europen Union," Trump said at the time. "They're really taking advantage of us. We have over a $300BN deficit. I wouldn't say there is a timeline, but it'll happen very soon."
Car exports to the U.S. are a significant foreign exchange earner for the EU, accounting for approximate earnings of €77.2BN in U.S. exports in 2023 (14.7% of the total).
However, downside damage to the Euro will likely prove limited as markets have become used to Trump's regular tariff outbursts.
There will be a negotiating process before they are levied, meaning the eventual outcome would most likely be less damaging than the headlines.
From a technical perspective, Thursday's rally takes GBP/EUR into a renowned resistance zone. As the chart above shows, levels above here are hard to hold.
Market participants with exchange requirements will be viewing current levels as opportune for selling Sterling ahead of another potential setback.