Pound Sterling surges against US Dollar ahead of US-China trade talks
- The Pound Sterling jumps to near 1.3300 against the US Dollar ahead of the US-China meeting over the weekend.
- Investors have cheered the US-UK trade deal announced on Thursday.
- The BoE cut interest rates by 25 bps to 4.25%, while the Fed left them unchanged in the range of 4.25%-4.50% this week.
The Pound Sterling (GBP) recovers intraday losses and advances to near 1.3300 against the US Dollar (USD) in North American trading hours on Friday. The GBP/USD pair attracts bids as the US Dollar corrects slightly after a strong upside on Thursday.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, retraces significantly to near 100.10 from an almost a month high of 100.85 posted on Thursday. The USD Index rose sharply the previous day after the announcement of a trade deal between the US and the UK.
A strong upside move in the US Dollar reflected that financial market participants have cheered the first trade deal by the White House under the leadership of US President Donald Trump since the ‘Liberation Day’. This has boosted investors’ confidence that tariffs announced by Trump are more of a “tactic” to have a dominant position while negotiating trade deals with other nations, and have eased fears of higher import duties derailing the economy.
However, the materialistic impact of the US-UK trade deal is limited as Washington already enjoys a trade surplus against London. Therefore, the real boost for investors’ confidence in the US economy would increase if the trade war between Washington and China de-escalates after their meeting in Switzerland on Saturday.
US Treasury Secretary Scott Bessent and Trade Representative Jamieson Greer have confirmed that they will meet their Chinese counterparts over the weekend, aiming to de-escalate the trade war.
Meanwhile, US Commerce Secretary Howard Lutnick has also expressed confidence in improving trade relations between the world’s two largest powerhouses. “De-escalation with China is Bessent's goal in talks,” Lutnick said in an interview with CNBC on late Thursday.
Ahead of the Sino-US trade discussions, President Donald Trump has signaled that tariffs on Beijing could be reduced to 80% through a post on Truth.Social. "80% Tariff on China seems right! It's up to Scott Bessent," Trump said.
Daily digest market movers: Pound Sterling gains against its peers
- The Pound Sterling outperforms its peers, except the Japanese Yen (JPY), on Friday. The British currency capitalizes on the announcement of the trade deal between the United States (US) and the United Kingdom (UK) the previous day, and the Bank of England (BoE) interest rate cut decision, with a 7-2 vote split.
- The BoE lowered interest rates by 25 basis points (bps) to 4.25%, as expected, marking the fourth rate cut in the current monetary expansion cycle. BoE Monetary Policy Committee (MPC) member Catherine Mann and Chief Economist Huw Pill favored leaving interest rates unchanged, while investors expected all MPC members to vote for an interest rate reduction. Out of seven MPC members who supported monetary policy easing, two officials, Swati Dhingra and Alan Taylor, backed a bigger reduction of 50 bps.
- Other factors from the monetary policy announcement, which fetched bids for the Pound Sterling, were the retention of a “gradual and careful” policy-easing approach and an upwardly revised Gross Domestic Product (GDP) forecast for the current year. The BoE sees the economy expanding at a faster pace of 1%, up from 0.75% projected in the February meeting.
- However, BoE Governor Andrew Bailey has warned of upside risks to the economy due to the global trade war. "Global economic environment is likely to continue to be challenging and less predictable than it was in the past," Bailey said during European trading hours.
- Meanwhile, the US Dollar was also outperforming after the Federal Reserve’s (Fed) monetary policy announcement on Wednesday, in which the central bank left interest rates steady in the range of 4.25%-4.50% for the third time in a row. The Fed guided that monetary policy adjustments would be appropriate only if officials get clarity on how new economic policies by US President Trump will shape the economic outlook.
- Fed Chair Jerome Powell warned of stagflation risks in the face of tariffs announced by Trump. “Tariffs so far announced are significantly bigger-than-expected, and we will see higher inflation, and lower employment if large increases in tariffs as announced are sustained,” Powell said.
Technical Analysis: Pound Sterling to face downside if it breaks below H&S formation
The Pound Sterling attracts bids near the three-week low of 1.3210 against the US Dollar on Friday. However, the outlook of the pair has turned uncertain due to the formation of a Head and Shoulders (H&S) chart pattern on the 4-hour timeframe after it revisited the three-year high around 1.3450. A breakdown of the H&S chart pattern leads to a bearish reversal, and its formation near a critical resistance increases its credibility.
The Cable trades below the 50-period Exponential Moving Average (EMA), which is around 1.3305, suggesting that the near-term trend is bearish.
The 14-period Relative Strength Index (RSI) seems vulnerable around 40.00. Should a bearish momentum trigger if the RSI falls below the 40.00 level.
On the upside, the three-year high of 1.3445 will be a key hurdle for the pair. Looking down, the psychological level of 1.3000 will act as a major support area.
Tariffs FAQs
Tariffs are customs duties levied on certain merchandise imports or a category of products. Tariffs are designed to help local producers and manufacturers be more competitive in the market by providing a price advantage over similar goods that can be imported. Tariffs are widely used as tools of protectionism, along with trade barriers and import quotas.
Although tariffs and taxes both generate government revenue to fund public goods and services, they have several distinctions. Tariffs are prepaid at the port of entry, while taxes are paid at the time of purchase. Taxes are imposed on individual taxpayers and businesses, while tariffs are paid by importers.
There are two schools of thought among economists regarding the usage of tariffs. While some argue that tariffs are necessary to protect domestic industries and address trade imbalances, others see them as a harmful tool that could potentially drive prices higher over the long term and lead to a damaging trade war by encouraging tit-for-tat tariffs.
During the run-up to the presidential election in November 2024, Donald Trump made it clear that he intends to use tariffs to support the US economy and American producers. In 2024, Mexico, China and Canada accounted for 42% of total US imports. In this period, Mexico stood out as the top exporter with $466.6 billion, according to the US Census Bureau. Hence, Trump wants to focus on these three nations when imposing tariffs. He also plans to use the revenue generated through tariffs to lower personal income taxes.
Author
Sagar Dua
FXStreet
Sagar Dua is associated with the financial markets from his college days. Along with pursuing post-graduation in Commerce in 2014, he started his markets training with chart analysis.
