GBP/USD steadies near 1.2600, downside appears due to Trump’s tariff threats

GBP/USD could struggle due to new tariff threats from US President Donald Trump.
The latest FOMC Meeting Minutes emphasized needing more time to assess multiple factors before considering any rate adjustments.
The British Pound struggled to gain traction despite a stronger-than-expected annual inflation rate.

Akhtar Faruqui FXStreet

GBP/USD holds ground after registering losses in the previous two successive days, hovering around 1.2590 during the Asian session on Thursday. However, the pair faces pressure as concerns over tariffs from US President Donald Trump lent support to the US Dollar (USD). Trump has confirmed that a 25% tariff on pharmaceutical and semiconductor imports will take effect in April. Additionally, he reaffirmed that auto tariffs will remain at 25%, further escalating global trade tensions.

Market participants are now focused on key US economic data, including weekly Initial Jobless Claims, the CB Leading Economic Index, and the Philly Fed Manufacturing Index, set to be released during the North American session.

The Federal Open Market Committee (FOMC) Meeting Minutes for January’s policy meeting, published on Wednesday, reaffirmed the decision to keep interest rates unchanged in January. Policymakers emphasized the need for more time to assess economic activity, labor market trends, and inflation before considering any rate adjustments. The committee also agreed that clear signs of declining inflation are necessary before implementing rate cuts.

Despite a stronger-than-expected annual inflation rate released on Wednesday, the Pound Sterling (GBP) failed to gain traction. The UK’s Office for National Statistics (ONS) reported that January’s Consumer Price Index (CPI) rose 3.0% year-over-year, surpassing December’s 2.5% increase and market expectations of 2.8%. This figure remains well above the Bank of England’s (BoE) 2% inflation target.

BoE policymakers have previously acknowledged that inflation could rise in the short term due to higher energy prices before gradually returning to the target level. BoE Governor Andrew Bailey reiterated earlier this week that while inflation may temporarily rise, he does not expect it to be persistent and still sees a gradual disinflationary trend.

Pound Sterling FAQs

What is the Pound Sterling?

The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, also known as ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).

How do the decisions of the Bank of England impact on the Pound Sterling?

The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.

How does economic data influence the value of the Pound?

Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.

How does the Trade Balance impact the Pound?

Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.

Author

Akhtar Faruqui

FXStreet

Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.

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