31/05/2025 by Tony Redondo
The US Dollar continues to dip as the Moody’s debt downgrade, weak GDP and TACO (Trump Always Chickens Out) continue to fuel a ‘Sell America’ sentiment in the financial markets.
Last week, Moody’s downgraded the US credit rating from ‘Aaa’ to ‘Aa1’ due to growing debt concerns. Weak US GDP data with a 0.3% contraction in the first quarter of 2025 coupled with uncertainty around the Federal Reserve’s response to job cuts and inflation, has also weakened US Dollar sentiment. The US dollar index recently hit its lowest level since 2023.
The TACO acronym describes a pattern where President Trump announces aggressive tariff policies, causing market volatility, only to later scale back, delay, or reverse these tariffs, leading to market rebounds. Wall Street traders have used this term to capitalize on the predictable market dips and recoveries, buying stocks when tariffs are threatened and selling when Trump backs off. The term has gained traction but has also provoked a strong reaction from Trump, who called it a “nasty” characterization and defended his actions as strategic negotiation.
Currency Exchange Rates Update
The Pound closed May up nearly 1.5% against the Euro. The ECB (European Central Bank) is expected to cut eurozone interest rates again next week but may signal a slower future pace of easing. This may limit any further downside for the Euro against the Pound.
The Pound closed May up over 1% and hit its highest level against the US Dollar since February 2022 on the back of a weaker USD, the rise in UK inflation to 3.5%, nearly double the BoEs (Bank of England) 2% target, and the perception that the BoE is less likely to cut UK interest rates much with only one 0.25% cut now pencilled in before the end of 2025.
The pound has outperformed over 70% of a 50-currency basket in 2025 to date.
This week, the key economic data releases include:
Monday UK Nationwide House Prices & PMI Manufacturing
EU PMI Manufacturing
Germany PMI Manufacturing
Tuesday EU CPI Inflation & Employment
USA Factory Orders
Wednesday Australia GDP
Canada Bank of Canada interest rate decision
Thursday EU ECB Interest rate announcement
Germany Manufacturing & Industrial Orders
USA Trade Balance & Deficit
Friday UK Halifax House Prices
EU GDP
Germany Industrial Production
Canada Employment
USA NFP & Unemployment Rate
What’s in the news?
Last week, Prime Minister Keir Starmer hailed his ‘reset’ agreement with the EU which he vowed would give the UK “unprecedented access to the EU market – the best of any country outside the EU or EFTA” and that the agreement will “boost British exporters because, once again after a long absence, we’ll be able to sell great British burgers, shellfish and other products into the EU”. The reset has however been lambasted by the EU Commission which named ten major Single Market barriers.
The issues they identified include complicated business establishment and operations, long delays in standard-setting that weigh on innovation and competitiveness and fragmented rules on packaging, labelling and waste.
UK
The Nationwide reported that rural house prices have soared since the Covid pandemic. From 2020 to 2023, prices in rural regions rose by 23%, compared to 18% in urban areas.
Alan Taylor, a member of the interest rate setting MPC (Monetary Policy Committee) at the BoE called for further interest rate cuts and feels the fresh inflation surge was driven by “one-off factors” related to Trump’s trade war. Taylor said recent trade progress, with the UK’s deals with the US, EU and India were “welcome,” but warned they only touched small parts of the UK’s trade operations and warned there was “more risk piling up on the downside scenario because of global developments.”
The UK is poised to sign a trade agreement with the GCC (Gulf Cooperation Council) including Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates expected to be worth as much as £1.6bn, with hopes that the value will rise by an additional £8.6bn a year by 2035. Talks between the UK and the GCC have been ongoing since 2022. The agreement is expected to be especially important to the UK car and financial services industries.
Good news
Middleton Advisors reported that Prime Central London and country properties represent value for overseas investors with prices back at 2013 levels in nominal terms and significantly lower when adjusted for the rise in the value of both the dollar and gold in the last twelve years.
Over the next five years, KFC plans to invest $2 billion in the UK and Ireland, create around 7,000 jobs and open a further 500 sites over the next ten years.
Toyota is set to enhance its manufacturing presence in the UK by investing approximately £41m in a new production line for GR Corollas at its Derbyshire factory. This initiative aims to produce around 10,000 cars annually for the US market, addressing the growing demand and reducing wait times.
Not so good news
The IMF (International Monetary Fund) warned of a ‘major threat to UK prosperity’ despite upgrading Britain’s growth forecast citing the threat to Britain’s economic recovery from low productivity, health problems and Trump’s tariffs.
The IMF upgraded its growth forecast for this year from 1.1% to 1.2% but warned Chancellor Rachel Reeves she must “stay the course” and stick to her fiscal rules as a host of risks threaten the national finances. It stated, “Persistently weak productivity remains the UK’s primary obstacle to lifting growth and living standards”, that Britain suffers from “chronic under-investment” and a “deterioration in health outcomes” and “limited access to finance for businesses to scale up, skill gaps, and a deterioration in health outcomes”.
The IMF also warned that UK public spending will swell to more than half of GDP over the next 25 years based on current policies, the highest level seen since the 1940s, with the brief exception of the 2020 coronavirus lockdown when parts of the economy were temporarily shuttered.
https://www.bbc.co.uk/news/articles/cx2jy0jk231o
Credit ratings agency Moody’s has warned the Chancellor’s NIC raid risks creating a tax doom loop of increased taxes and diminished growth. Moody’s said “The fiscal headroom remains vulnerable to downward revisions to UK growth forecasts or higher interest rates, which may necessitate new tax measures in the autumn Budget that risk further subduing growth. For example, the Government decision to raise employer National Insurance contributions in the October 2024 budget dented business confidence and will weigh on growth in 2025. Spending pressures have also increased because of geopolitical risks that necessitate higher defence spending.”
The FSB (Federation of Small Businesses) is calling on Angela Rayner to provide a sick pay exemption in her proposed workers’ rights reforms. Her Employment Rights Bill aims to implement statutory sick pay from the first day of employment, with the current waiting period of three days removed so it is paid from the first day an employee is off work. However, small businesses warn that these changes could cost them millions and hinder their ability to hire new staff. According to the FSB, 35% of small business owners believe a sick pay rebate would encourage them to employ more individuals currently out of work. The bill’s impact assessment suggests that costs for SMEs could rise from £400m to approximately £660m.
The BRC (British Retail Consortium) reported that food inflation in the UK rose by 2.8% year-on-year in May, the fourth consecutive month of price rises.
Property database provider TwentyCi reported that the UK rental market is facing a significant supply crisis with the number of available properties plummeting to an all-time low of 284,000, an 18% decrease from the previous year with a third of landlords considering selling their properties because of “recent legislative changes,” including increased stamp duty on second homes. The upcoming Renters’ Rights Bill, effective July, will introduce measures such as banning no-fault evictions and mid-contract price hikes. Average UK rents have risen by 4.5% in the first quarter of 2025 compared to 2024 with nearly half of available properties listed at over £1,500 per month.
Job listings search engine Adzuna reported that graduate job openings have fallen by 22.8% in the 12 months to April as Rachel Reeves’s tax policies lead businesses to reduce hiring for entry-level positions. Andrew Hunter, co-founder of Adzuna, remarked “After signs of recovery in March, April brought a reminder that this remains a delicate job market.” The overall job market is also struggling, with vacancies down to 761,000, marking the worst conditions since January 2017, excluding the pandemic.
Volvo plans to cut 3,000 jobs amid a slowdown in electric car demand. Volvo’s restructuring plan will cut costs by £1.4 billion as the Swedish carmaker is dealing with high costs, trade uncertainty and falling electric car demand.
The CBI (Confederation of British Industry) reported that Labour’s tax rises have driven the steepest fall in retail sentiment since Covid. Grim sentiment in the sector reflects a tough set of financial metrics, with year-on-year retail sales tumbling 27% from May 2024. June’s numbers are expected to be even worse, anticipated to plummet 37% from the same month the year before.
ABF, owner of the Vivergo Fuel plant in Yorkshire, Britain’s largest bioethanol plant, has written to farmers warning it’s planned to suspend purchases of wheat used in the production process unless the government urgently steps in, putting as many as 4,000 livelihoods at risk.
USA
US-EU trade tensions eased after President Trump agreed to delay his 50% tariff threat from 1 June to 9 July after a phone call with EU Commission President Ursula von der Leyen. A European Commission spokesperson said they both agreed to “fast track the trade negotiations”.
The US Conference Board reported that consumer confidence increased from 85.7 to 98, well above the Bloomberg consensus of 87.1.
The latest Fed minutes reveal concerns about rising inflation risks, a weakening labor market, and potential shifts in the US Dollar’s safe-haven status.
The US Court of International Trade ruled that President Trump has overstepped his authority by invoking the International Emergency Economic Powers Act (IEEPA) to impose sweeping tariffs on numerous countries. The Manhattan-based court not only ordered a permanent halt to most of Trump’s tariffs but also barred any future modifications to them. The Trump administration swiftly and successfully appealed the ruling.
President Donald Trump said China has violated a preliminary trade agreement with the US. Trump made the claim in a social media post a day after Treasury Secretary Scott Bessent said that trade talks with China “are a bit stalled.”
The EU
ECB President Christine Lagarde said that a shifting geopolitical landscape could “open the door for the euro to play a greater international role.”
WEF (World Economic Forum) founder Klaus Schwab has claimed that Lagarde has discussed cutting short her term as ECB president to become chair of the WEF before her tenure at the ECB ends in 2027.
The four-way Dutch coalition looks in danger of falling apart over immigration policy due to Gert Wilders’ party insisting the Netherlands adopt his 10-point immigration plan. Apart from being at odds with EU policy, it is opposed by the rest of the coalition as it involves deporting criminal immigrants, policing the borders and slashing immigration numbers.
Others
India’s economy grew by a faster than expected rate of 7.4% in the March quarter thanks to strong domestic consumption and relatively lower dependence on exports. India has now overtaken Japan to become the world’s fourth-largest economy. Its expanding service sector, tech industry, and domestic demand are major drivers of the economy.
India’s economy grew by faster-than-expected 7.4% in the March quarter
China plans to make the Yuan (CNH) internationally accepted as an alternative to the all-mighty US Dollar’s role as the world’s reserve currency. The Yuan is the fifth most traded currency in the world but only accounts for 3.5% of foreign exchange market turnover and a mere 2.2% of global foreign exchange reserves compared to 58% for the US Dollar and 20% for the Euro. A huge stumbling block for the Yuan is the Chinese government’s capital controls and strong interventionist policy.
The global coal industry is facing an unravelling. China’s coal industry is mired in a maelstrom of falling prices, ballooning inventories, and power demand shifting to wind and solar. Analysts say the sector is now in a ‘vicious cycle’ of oversupply and obsolescence. Australia’s coal outlook has dimmed amid shrinking orders from Asian buyers with regional decarbonisation, rising competition, and energy diversification all eroding export volumes while Russian coal exports declined by 10% in 2024 amid tightened sanctions, shipping constraints, and waning demand in Asia. As EU markets are now largely closed to Russian coal, this trend is expected to continue.
Quote
Abraham Lincoln, “With public sentiment, nothing can fail. Without it, nothing can succeed.”
