Tech and Tariff Turmoil

Impact on GBP: Sterling bears outpace bulls

The market has turned into a net seller of the British Pound amid a shift in sentiment, but this change could position the currency for a recovery, with one Wall Street investment bank taking a bullish stance.

According to the latest Commitment of Traders report, investors are now net "short" on the British Pound, marking the first time positioning has turned negative since May 2024.

A "short" position indicates that a speculator or trader has invested in a contract that profits if the currency depreciates. The current shift, with selling interest outweighing buying interest, reflects a broader change in sentiment since late 2024.

"Broader GBP sentiment weakened after remaining roughly balanced since the end of last year. Speculative traders moved to a net short position on GBP overall for the first time since May 2024, while institutional money increased net GBP shorts by USD 800 million to just over USD 5 billion," explains Shaun Osborne, FX Strategist at Scotiabank. For much of 2024, the market had been net "long," benefiting from the Pound's ongoing outperformance.

When a currency's positioning becomes heavily one-sided, it is more susceptible to reversals in its fundamental narrative. Such scenarios can trigger a rush to exit positions, amplifying selling pressure and accelerating declines.

This dynamic makes positioning a useful contrarian indicator. Speculators often target currencies that appear overextended in one direction.

No Major Data

Impact on EUR: Risk premium may expand further

The market view is that the recent equity market turmoil and renewed tariff risks will likely have a greater impact on EUR/USD than the expected 25bp rate cut and the probable reiteration of dovish guidance.

The tariff threat is being taken more seriously due to active planning by the Treasury, which significantly limits the Euro’s upside potential. Outside of a USD correction driven by easing global tariff concerns, the Euro continues to lack any strong domestic bullish catalysts. A dovish ECB is expected to confirm this sentiment later this week.

In light of the overnight tariff-related developments, the short-term risks for EUR/USD appear to have shifted to the downside, with a potential return below $1.0400.

No Major Data

Impact on USD: Renewed protectionism concerns

This week, FX markets were expected to refocus on central bank events after a Trump-dominated start to the year. Instead, it has taken a different turn. Chinese startup DeepSeek's announcement of a more affordable AI model to rival US tech giants has rattled highly valued US tech equities, triggering a global stock selloff.

One notable observation is the Dollar’s muted response as a safe haven during the equity selloff. Markets appeared more concerned with the potential wealth effect on US consumers and increased expectations for a dovish Fed. As a result, traditional risk-sensitive currencies like AUD, NZD, NOK, and CAD came under pressure amid the risk-off sentiment, while the low-yielding JPY and CHF emerged as the preferred safe havens instead of the Dollar.

However, the Dollar rebounded strongly late yesterday as Trump reignited the relatively dormant issue of universal tariffs. According to an FT report, new Treasury Secretary Scott Bessent is advocating for a gradual rise in universal tariffs, starting at 2.5% and potentially increasing to as much as 20%. Trump followed up by expressing his preference for “much bigger” tariffs and hinted at targeted duties on products like steel, copper, and semiconductors.

These comments challenge the market’s earlier assumption that tariffs would be applied on a case-by-case basis (as seen with Colombia) rather than universally. The fact that these plans are being actively developed by the Treasury, rather than just floated by Trump, suggests that the additional risk premium now factored into Dollar crosses may be more persistent.

While equity futures suggest some potential stabilisation today, the risk of further valuation-driven repricing in US tech stocks remains significant. Even if the Dollar isn’t the go-to safe haven during equity selloffs, the broader implications of tariffs present a longer-term concern for FX markets. The perceived inflationary impact of protectionism is already counteracting the dovish repricing of Fed expectations linked to equity declines. Unless the Fed signals tomorrow that it is closely monitoring equity volatility, there appears to be little macroeconomic justification for a dovish pivot, leaving room for further Dollar strength.

Major Data: CB Consumer Confidence - 3pm

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