Pound Sterling Rises vs Euro and Dollar as UK Avoids Tariffs, for Now

February 3, 2025 - Written by Frank Davies

STORY LINK Pound Sterling Rises vs Euro and Dollar as UK Avoids Tariffs, for Now

The US Dollar (USD) spiked higher against rival currencies such as the Euro (EUR) and Pound (GBP) on Monday following President Trump’s move to impose 25% tariffs on Canada and Mexico.

The dollar index jumped to 2-week highs at 109.80 and close to 2-year highs.

ING commented; “Unless Donald Trump surprises with a very last-minute de-escalation in tariffs (unlikely) expect DXY to stay bid near this year's high.”

The Pound to Dollar (GBP/USD) exchange rate slumped to 1.2250 before a recovery to around1.2300.

According to ING; “A bias towards 1.2200 and possibly 1.2100 for GBP/USD looks likely this week, depending on the US trade story.”

Trump insisted that tariffs on the EU were inevitable while the UK was out of line, but he considered that something could be worked out.

The Pound to Euro (GBP/EUR) exchange rate hit 20-day highs at 1.2030 before settling at 1.2020.

According to ING; “The growing prospect of a global trade war and tariffs heading towards the EU is a clean euro negative.”

Trump used the International Emergency Economic Powers Act (IEEPA) to impose 25% tariffs on Canada and Mexico with a 10% tariff on China from February 4th.

ING commented; “Investors will be on tenterhooks to see whether any phone conversation today between President Trump and his counterparts in Canada and Mexico can yield any results in 24 hours. Probably not is most people's guess.”

It added; “The trouble for investors, however, is that the off-ramp to these tariffs remains unclear.”

Danske Bank took a similar view; “Overall, the broad USD remains the key beneficiary of the tariffs and will likely continue to find support amid souring sentiment as markets reprice the risks of escalating trade tensions.”

According to MUFG; “Overall, the tariff announcements from President Trump over the weekend support our forecasts for a stronger US dollar during the first half of this year.”

In theory, the UK should be less vulnerable to the imposition of tariffs, especially as the UK does not run a significant trade surplus with the US.

Nevertheless, the overall fundamentals are fragile and wider deterioration in risk appetite would pose important risks to the UK economy and currency.

Danske Bank commented; “the fragile fiscal position combined with conducting an expansionary fiscal policy leaves the UK vulnerable to the global backdrop. Especially when we see a substantial tightening of global financial conditions, a sharp move higher in global rates combined with historically elevated levels in global long-end yields.”

It added; “This is further amplified in an environment characterised by a sharp sell-off in risk where liquidity becomes scarce since the UK runs a large current-account deficit, which makes GBP vulnerable whenever capital inflows fade.”

Saxo chief macro strategist John Hardy noted the risk of damage to the global outlook; "we are effectively in a trade war with all the associated fallout for growth and prices and disruptions to supply chains and companies."

He added; "The chief longer-term risk is one of stagflation: weak growth with higher inflation levels.”

Trade concerns will be another headache for the Bank of England which is already facing major uncertainty over the domestic outlook.

There are strong expectations that the Bank of England will cut interest rates this week with a 25 basis-point move to 4.50% from 4.75%.

At this stage, there has been a limited shift in medium-term pricing with money markets pricing in 80 basis points of cuts by the end of 2025 from 75 basis points late last week.

Exchange Rates Today: 03 Fed 2025 12:45

Pound to Euro exchange rate (GBP/EUR) is 1.20171 (+0.19%)
Pound to Dollar exchange rate (GBP/USD) is 1.23395 (+0.4%)
Pound to Swiss Franc exchange rate (GBP/CHF) is 1.12832 (+0.31%)
Pound to Canadian Dollar exchange rate (GBP/CAD) is 1.81007 (+0.1%)
Pound to Australian Dollar exchange rate (GBP/AUD) is 2.00522 (+0.21%)
Pound to New Zealand Dollar exchange rate (GBP/NZD) is 2.21528 (+0.39%)
Pound to Norwegian Krone exchange rate (GBP/NOK) is 14.07746 (-0.09%)
Pound to Japanese Yen exchange rate (GBP/JPY) is 190.57972 (-0.18%)
Pound to Swedish Krona exchange rate (GBP/SEK) is 13.81153 (+0.11%)
Pound to South African Rand exchange rate (GBP/ZAR) is 23.27853 (-0.43%)
Pound to Israeli Sheqel exchange rate (GBP/ILS) is 4.44751 (+1.04%)
Pound to Norwegian Krone exchange rate (GBP/NOK) is 14.07746 (-0.09%)
Pound to Singapore Dollar exchange rate (GBP/SGD) is 1.6849 (+0.21%)

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TAGS: Pound Euro Forecasts