Pound Sterling is a Buy: UK Looks to Dodge Trump’s Trade Wars

February 5, 2025 - Written by Ben Hughes

STORY LINK Pound Sterling is a Buy: UK Looks to Dodge Trump’s Trade Wars

Risk appetite rebounded strongly during Monday’s New York session as the immediate threat of US tariffs on Mexico and Canada was withdrawn.

This positive impact on risk was offset in Asia as the additional 10% tariffs on Chinese exports to the US went into effect with markets also expecting action against the EU.

The Pound overall held firm amid hopes that it could avoid direct trade action from the US.

The Pound to Dollar (GBP/USD) exchange rate traded around 1.2435 from Monday lows at 1.2250 with the Pound to Euro (GBP/EUR) exchange rate around 1.2025.

Mexico and Canada both secured a 1-month delay for imposing tariffs after top-level bilateral talks with Trump.

China, however, also announced retaliation with tariffs on US gas and coal exports as well as export controls on rare-earth metals.

Inevitably, there was choppy trading across all major currencies.

ING commented; “the rollercoaster of trade news in the past few days does leave markets with a higher degree of uncertainty and unpredictability.”

Markets will inevitably adjust their behaviour given Trump’s use of the tariff threat as a negotiating tool.

According to ING; “If markets were reluctant to fully price in the impact of tariffs until the very last minute, yesterday’s turnaround by Trump may well warrant even greater caution when it comes to future protectionism threats.”

ING added; “For FX, this means the dollar may not experience big rallies against directly and indirectly impacted currencies simply on the back of a tariff announcement, but only after duties effectively come to place and there are indications that they will stay.”

US-China trade tensions will trigger unease over the global economy.

Khoon Goh, head of Asia research at ANZ Banking Group commented; “Unsurprisingly, a risk off tone has taken hold of markets.”

There will be a negative impact on the Euro-Zone economy while the threat of US tariffs on EU exports will also hang over the single currency and potentially underpin GBP/EUR.

MUFG commented; “While there is more optimism now that he will not back up his words with actions, it remains to be seen how negotiations work out between the EU and Trump. The lingering uncertainty is likely to contribute to the euro continuing to underperform in the near-term.”

Prime Minister Starmer held talks with EU leaders on Monday.

According to ING; “That was officially aimed at strengthening an EU-UK defence path, but on which markets may be double reading an intent by Starmer to gradually reconnect with the EU politically. That is inarguably positive for sterling, which remains highly sensitive to any development that can improve a worsening growth outlook.”

The Pound, however, will be hampered by strong expectations of a Bank of England rate cut at Thursday’s meeting and concerns that fiscal headroom will evaporate, forcing further tax increases or spending restraint.

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TAGS: Pound Sterling Forecasts