Image © White House
Trump rows back on threats to fire Federal Reserve Chair Powell.
Recovering equity markets point to an improved sentiment amongst global investors, which helped the Pound-to-Euro exchange rate stage a recovery to 1.17.
The relief rally followed U.S. President Donald Trump's decision to backtrack on his threat to fire Federal Reserve Chair Jerome Powell, saying he had "no intention of firing him".
Trump spooked the markets on Monday after launching a stinging attack on the Fed Chair, calling him a "loser" whose decision to hold interest rates risks sending the economy into decline.
Striking a more diplomatic tone on Tuesday, Trump told reporters Powell could be "a little more active in terms of his idea to lower interest rates."
Alongside, U.S. Treasury Secretary Scott Bessent made conciliatory remarks regarding China, saying the current tariff situation is "unsustainable" and that he expects a de-escalation in the near term.
The comments from Trump and Bessent point to a coordinated cooling of temperature, which investors welcomed.
U.S. equities more than reversed Monday's decline with major indices closing between 2.51% (S&P 500) and 2.71% (Nasdaq) higher.
The Dollar also recovered against all major peers, while the Euro lost ground.
"The comments follow a sharp sell-off in the U.S. dollar and equity markets on Monday, on the financial uncertainty that a direct executive intervention into U.S. monetary policy would cause," says Edward Bell, analyst at Emirates NBD.
The DXY dollar index - a measure of broad-based U.S. Dollar performance - tested a new three-year low at 97.92 on Monday, amidst fears Trump's tariff policy and attacks on the Fed would damage the U.S. economy.
This helped the Pound-Dollar exchange rate to a new seven-month high at 1.3423. However, it is the Euro-Dollar that has put its skates on, having surged to its highest level in more than three years at 1.1572.
The outperformance in EUR/USD relative to GBP/USD mechanically means the GBP/EUR exchange rate must fall. Hence, the current 'sell America' setup is proving a weight on GBP/EUR.
Above: GBP/EUR (top) and the S&P 500.
When the 'sell America' trade subsides, the GBP/EUR can recover, as is the case following Trump's softening stance towards the Fed.
The EUR/USD is now also significantly overvalued from a technical perspective and analysts are looking for a pullback, which would further aid a recovery in GBP/EUR towards 1.1726, which is the approximate location of the current consolidation range.
However, analysts think we could be merely witnessing a pause in the Dollar's selloff, meaning the Euro-Dollar is ultimately poised to resume its rally at some point, which would inevitably weigh on the Pound.
"EUR-strength, renewed pressure on LT gilts and a global risk-off finally pushed EUR/GBP for a test of the 0.87 area. Sterling stays vulnerable," says Mathias Van der Jeugt, an analyst at KBC Bank.