A worker invited to Trump's tariff announcement in the Rose Garden at the White House. Image: The White House Press Office.
Pound Sterling is caught in the crossfire of a massive Euro-Dollar unwind.
Significant investor flows from the U.S. to Europe are causing a surge in the Euro against the Dollar in the wake of U.S. tariff announcements.
Over the years investors have built up significant unhedged positions in U.S. equity markets and bonds as they look to take advantage of U.S. economic and market exceptionalism.
The assumption was that when stocks moved lower, the Dollar would move higher in a traditional safe-haven response. This provided a natural hedge against downturns.
However, during the 'tariff trade' era, the Dollar is tracking stocks lower, creating significant losses for international investors who invested heavily in the U.S. as the natural hedge has dissipated.
This is creating a cascading effect of flows as investors bail, leading Deutsche Bank analyst George Saravelos to warn it could destabilise the Dollar.
The Euro and Pound are surging against the Dollar as a result.
At the time of writing Euro-Dollar is up 2.0%, and GBP/USD is up 1.0%. But because EUR/USD is outpacing GBP/USD the natural cross-currency impact for the Pound-to-Euro exchange rate is a 1.0% loss.
So, we are seeing Pound Sterling experience significant cross-flow pressures when it comes to the Euro.
At the same time, the Eurozone's single currency appears to be taking the announcement of a 20% U.S. import tariff in its stride amidst hopes that negotiations will result in a lower tariff rate..
U.S. President Donald Trump announced the tariff overnight, while confirming a 25% tariff on vehicle imports was also to proceed.
"Now we're going to charge the European Union. They're very tough. Very, very tough traders. You know, you think of the European Union, very friendly. They rip us off. It's so sad to see. It's so pathetic," Trump said.
The initial reaction to the news was a rise in the Pound-to-Euro exchange rate to a high of 1.20, which suggested the tariff was more severe than might have been expected.
The Euro's recovery hints at some hope that the announced tariffs will be watered down: the European Commission's Ursula von der Leyen said on Thursday the EU is preparing a response but that the outcome of negotiations will determine the final measures.
Above: GBP/EUR at daily intervals.
Europe is "already finalising its first package of measures in response to the first tariffs on steel" and preparing further countermeasures if negotiations fail.
Press reports covering the White House in recent days have hinted that the President would be open to negotiations, and investors apparently see the Thursday announcement as a starting point.
"He is always up to take a phone call, always up for a good negotiation, but he is very much focused on fixing the wrongs of the past," said Karoline Leavitt, the White House press secretary, ahead of the tariff announcement.
The prospect of a lower tariff rate for the EU - in the event of successful negotiations - has taken the sting out of Wednesday's announcements.
However, analysts are wary of chasing the Euro rally too far, as the Eurozone now faces a significant impediment to an enduring economic recovery, and it won't be until next year that the effects of Germany's spending expansion are felt.
This should limit Pound-Euro downside.
"We don't really buy into the story that the worst is out of the way for Europe now," says Chris Turner, head FX analyst at ING Bank.