Sterling Faces Downside Risks After Spring Statement

FX markets remain in a holding pattern ahead of next week’s U.S. reciprocal tariffs. Recent euro optimism is fading, and sterling may face downside risks following the Spring Statement.

Meanwhile, the Czech National Bank is expected to maintain rates at 3.75%, while Turkish markets are stabilizing after last week’s sharp volatility.

USD: Holding Pattern

The DXY dollar index has found support below 104.00, aided by improved stability in U.S. asset markets.

• The S&P 500 has retraced around 40% of this year’s losses, partially due to speculation that Washington’s tariffs on April 2 might be softer or more targeted.
• The next round of tariffs could initially strengthen the dollar as part of a broader restructuring of the global trading system.

For now, the USD is expected to trade within a 104.00 – 104.50 range, with upside risks if a weaker GBP drags European currencies lower.

EUR: Tariff Risks Underpriced

After a volatile start to the month, EUR/USD markets are stabilizing:

• One-month volatility has dropped from 9% to 7%.
• One-week volatility is now below 8%, down from 11%.

However, markets may be underestimating tariff risks. The EU, led by Germany, maintains a large trade surplus with the U.S., making it a likely target alongside China.

A potential tariff escalation could push EUR/USD toward 1.05 by the end of Q2.

For now, key support levels stand at 1.0765/70, with risks of a decline to 1.0730 if GBP weakens after the Spring Statement.

GBP: Fiscal Tightening and Monetary Easing Weigh on Sterling

UK Chancellor Rachel Reeves will deliver the Spring Statement at 13:00 CET, with a focus on spending cuts to maintain fiscal discipline.

• Estimated £15 billion in spending cuts.
• The Office for Budget Responsibility (OBR) is expected to downgrade growth forecasts.

Bond markets will react if gilt issuance surpasses expectations. Analysts estimate FY25/26 issuance at £302-304 billion, but figures exceeding £320 billion could trigger a sell-off in gilts and GBP.

Additionally, markets may be underpricing the Bank of England’s easing cycle. While 40bps of rate cuts are currently priced in, further easing could push GBP/USD down to 1.2860 – 1.2800.

TRY: Some Stability Returns

Last week saw a disorderly sell-off in Turkey’s lira, as foreign investors pulled an estimated $20 billion from carry trades.

• USD/TRY surged 10-12% before authorities intervened.
• The Central Bank of Turkey raised its overnight lending rate by 200bps to 46%.

Despite signs of stabilization, carry trade interest in TRY may not return to previous levels.

Cre: CNBC

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