The British pound remained relatively stable against the US dollar in early European trading on Tuesday, hovering around $1.2376, as investors assessed the potential ramifications of escalating trade tensions. This follows US President Donald Trump’s recent executive order imposing a 25% tariff on steel and aluminum imports, effective March 12th.
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While these tariffs will impact various countries, President Trump has hinted at a possible exemption for Australia. Jim Reid, a market strategist at Deutsche Bank (DBK.DE), noted that this action “revives and expands tariffs introduced back in 2018.” He further highlighted President Trump’s indication that details regarding reciprocal tariffs would be forthcoming, with the possibility of even higher metal tariffs and potential levies on chips and cars.
Potential Inflationary Pressures and Market Response
Deutsche Bank economists suggest that if these steel and aluminum tariffs, along with reciprocal measures, persist, they could contribute to a 30 to 40 basis point increase in the core personal consumption expenditures price index by 2025. This projection depends on the extent to which these costs are passed on to consumers. Furthermore, if previously delayed tariffs on Canada and Mexico are also implemented, inflation in 2025 could potentially exceed 3.5%. However, the current assumption is that the impact of these tariffs will be largely confined to the current year.
Reid also cautioned that while the Federal Reserve might prefer to maintain a steady interest rate policy in response to these price level changes, their ability to do so could be limited if inflation expectations rise or if the labor market contributes to further inflationary pressures. The pound also held steady against the euro, trading at approximately €1.1991.
Gold Nears Record Highs as Safe-Haven Asset
Meanwhile, gold prices neared record highs as investors sought refuge in the precious metal as a hedge against potential inflation spurred by the tariff implementations. Spot gold remained relatively unchanged at $2,910.30 per ounce, with gold futures also holding steady around $2,936.70 per ounce.
Joe Maher, assistant economist at Capital Economics, suggested that concerns about gold being caught in the crossfire of a trade war might have prompted US investors to acquire gold in anticipation of potential tariffs on US gold imports. He observed that gold’s recent rally has not been driven by traditional factors like the dollar or real yields.
Oil Prices Surge Despite Tariff Concerns
Oil prices experienced a surge on Tuesday morning, defying concerns about the potential economic fallout from the tariffs. Brent crude futures climbed 1% to $76.73 per barrel, while US West Texas Intermediate (WTI) crude also rose 1% to reach $73.09.
Matt Britzman, senior equity analyst at Hargreaves Lansdown (HL.L), attributed the rise in Brent crude futures to tighter Russian supplies, new US sanctions on Iranian crude shipments, and escalating geopolitical tensions following President Trump’s call for Israel to end its ceasefire with Hamas. However, he acknowledged that the broader market gains were being tempered by growing trade frictions, tariffs on key materials, and surging natural gas prices in Europe.
Broader Market Performance
The FTSE 100 exhibited little change on Tuesday morning, trading around 8,764 points. These market movements reflect a complex interplay of factors, including trade tensions, geopolitical developments, and underlying economic conditions. Investors continue to monitor the evolving trade landscape and its potential impact on global markets.
