Pound Sterling trades with caution as Trump unveils fresh tariff threats
- The Pound Sterling broadly steadies against the US Dollar at around 1.3600 as Trump vows to push forward with new tariffs.
- Trump prepares to announce new tariff rates for over seven nations and indicated his intention to impose levies on copper and pharma products.
- Rising UK gilt yields pose long-term fiscal risks for the economy.
The Pound Sterling (GBP) trades cautiously around 1.3600 against the US Dollar during European trading hours on Wednesday, with the GBP/USD pair broadly stable after United States (US) President Donald Trump threatened a series of new tariffs on Tuesday.
At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades at 97.50, broadly stable on the day and not far from the weekly high of around 97.80
On Tuesday, US President Trump stated in a cabinet meeting that he will impose 50% tariffs on copper imports, aiming to boost domestic production. However, he didn’t provide a time frame. This marks the fourth specific product catergory targeted by Trump's tariffs following automobiles and auto parts, steel, and aluminum.
Apart from higher import duties on copper, US President Trump also threatened to impose an additional 10% tariffs on BRICS nations for attempting de-dollarization practices, and a 200% tax on pharmaceutical imports next year.
Daily digest market movers: Pound Sterling steadies as higher UK gilt yields increase long-term risks
- The Pound Sterling trades calmly against its major peers on Wednesday. The British currency regains composure after a sharp decline last week, following a relentless sell-off in United Kingdom (UK) gilt securities after Chancellor of the Exchequer Rachel Reeves broke her self-imposed fiscal rules to support a major reform in the welfare spending bill.
- UK gilt yields rallied last week after Chancellor Reeves announced an increase in standard allowance for Universal Credit (UC) before the House of Commons without outlining the source of funds to support this additional spending. An increase in the welfare bill is expected to increase the financial burden on the government’s books by £4.8 billion by fiscal year 2029-2030.
- Higher gilt yields means increased interest obligations for the administration. According to the Office for Business Responsibility (OBR), the UK has the third-highest borrowing costs of any developed economy, with 10-year gilt yields at around 4.63%.
- In terms of economic data, investors will focus on the monthly Gross Domestic Product (GDP) and factory data for May, which are scheduled to be released on Friday.
- Investors will also focus on the additional letters by US President Trump to be sent to over seven countries. These are expected to outline tariffs rates after not closing a trade deal during the 90-day pause. “We will be releasing a minimum of 7 Countries having to do with trade, tomorrow morning, with an additional number of Countries being released in the afternoon. Thank you for your attention to this matter!” Trump wrote in a post on Truth.Social. Still, the impact of these letters could to be limited as the effective date for imposition of reciprocal tariffs has been extended to August 1.
- During the North American session, investors will pay attention to the release of the Federal Open Market Committee (FOMC) minutes of the July 17-18 policy meeting.
Technical Analysis: Pound Sterling trades quietly below 1.3600
The Pound Sterling trades in a limited range around 1.3600 against the US Dollar on Wednesday. The GBP/USD pair wobbles around the 20-day Exponential Moving Average (EMA) near 1.3590, suggesting that the near-term trend is uncertain.
The 14-day Relative Strength Index (RSI) stays near 50.00, indicating that the bullish momentum has faded.
Looking down, the psychological level of 1.3500 will act as a key support zone. On the upside, the three-and-a-half-year high around 1.3800 will act as a key barrier.
Pound Sterling FAQs
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).
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.
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.
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.