Tariffs take hold, BoE poised to cut rates

Tariffs come into effect worldwide

US President Donald Trump's reciprocal tariff policy has come into effect, with rates ranging from 10% to 50%. Brazil finds itself bearing the heaviest burden – a staggering 50% aggregate tariff rate that marries a 10% reciprocal levy with a punitive 40% surcharge stemming from the judicial proceedings against former President Jair Bolsonaro. India, as expected, has been slapped with an additional 25% levy, with the country now confronting a threat of tariffs reaching 50% total. However, this will take effect in 21 days from yesterday, according to the signed executive order.

Meanwhile, Switzerland's diplomatic overtures have proven fruitless. Despite President Karin Keller-Sutter and Economy Minister Guy Parmelin's transatlantic journey to present a revised trade framework, their efforts failed to bridge the chasm that has widened following Trump's imposition of a 39% levy on Swiss imports.

In attempts to bring manufacturing back to the US, Trump also announced hefty plans to impose approximately 100% tariffs on chips and semiconductor imports, far surpassing analysts’ estimates. The President, however, noted that ‘if you are building in the US, there will be no charge’. Specifics of this hefty levy remain few and far between at the moment, but it has had a notable effect on Asian semiconductor stocks overnight, particularly in Japanese chip stocks.

Elsewhere in the market, the US dollar (USD) index fell by 0.6% yesterday and breached the 50-day simple moving average. Treasury yields bear steepened, with the front-end of the curve ending the session moderately lower. As you would expect, the euro (EUR) rallied 0.7% versus the USD. Meanwhile, in the commodities space, we are higher this morning across Spot Gold (XAU/USD) and Silver (XAG/USD) markets, up by 0.3% and 0.7%, respectively, with WTI oil (West Texas Intermediate) also trading higher by 0.8%.

BoE front and centre today

The Bank of England (BoE) takes centre stage today at 11:00 am GMT. As I am sure you are aware, the central bank is forecast to reduce the bank rate by 25 basis points (bps). Given this is fully priced in, a rate cut will unlikely move the market’s needle.

What could jolt the markets, nevertheless, is the MPC (Monetary Policy Committee) vote split. LSEG data suggests a 7-2 vote in favour of a rate reduction, though some desks expect a three-way vote split: two members opting to hold, five members voting for a 25 bp cut, with the remaining two eyeing a weighty 50 bp reduction. A more dovish split, of course, is likely to weigh on the British pound (GBP) and Gilt yields, while a more hawkish/cautious vote split could underpin a bid in said markets.

In my opinion, BoE policymakers are in a tricky spot; on one side of the fence, inflationary pressures are increasing – you will recall the June headline CPI inflation print increased by 3.6% up from 3.4%, which is also above the Q2 BoE estimate of 3.4% – and will naturally lead some policymakers to adopt more of a cautious stance. On the other side of things, weak economic activity, slowing pay growth and a loosening job market will likely be enough to get a 25 bp cut over the line.

All in all, forward guidance is unlikely to offer much to work with. I expect the message of a ‘careful and gradual approach’ to be reiterated, given the uncertainty remaining elevated. Nevertheless, if the central bank removes the word ‘gradual’ from its guidance, this could be considered hawkish and potentially take a rate cut off the table later this year, providing GBP bulls something to work with. Another scenario to pencil in – albeit highly doubtful – is that if the BoE signals an acceleration in the pace of easing, the GBP will sell off. Ultimately, I imagine guidance to strike a balance between acknowledging recent inflation stickiness and maintaining the gradual, quarterly easing trajectory.

For the updated economic forecasts, as I underlined in the week-ahead release, near-term inflation expectations are expected to be revised upwards, yet the BoE are likely to frame this as temporary inflation. In terms of the labour market, we can expect the central bank to highlight continued labour market slack and wage growth undershooting its 5.2% estimate (in the three months to June).