Fed Holds Steady Amid Tariff-Driven Uncertainty
The US Federal Reserve opted to leave interest rates unchanged once again, maintaining the federal funds target range at 4.25% to 4.50%. The accompanying statement echoed familiar sentiments: economic growth is continuing at a "solid pace", the labour market remains "strong", and inflation is still "somewhat elevated". The US dollar index edged higher in response, though gains were limited. Notably, the index opened above its 21-day moving average for the first time in over a month, albeit still below the 100 mark.
Despite the news, currency market reaction was relatively muted. Short-term rate differentials have recently had little sway over USD crosses. The dollar has eased slightly, largely due to the Fed’s acknowledgment of mounting risks around both inflation and unemployment, rather than any direct policy change. Policymakers highlighted growing uncertainty in the economic outlook, compounded by the higher-risk, tariff-laden landscape, and signalled the need for more clarity before adjusting course.
This cautious tone suggests rate cuts may be postponed, though when they do arrive, they could be more aggressive to make up for the delay — a scenario that may weigh further on the dollar in the months ahead. Investors will be closely watching forthcoming economic data for signs of whether stubborn inflation or weakening growth will force the Fed’s hand sooner than expected.
Pound Rises on Prospects of UK-US Trade Agreement
Sterling gained modestly overnight amid reports that President Trump is poised to announce a new trade deal with the United Kingdom later today. Should the agreement be confirmed, Britain would become the first country to de-escalate trade tensions with the US since the sweeping tariff regime was introduced on 2 April. Trump alluded to the announcement during a press event in the Oval Office — scheduled for 3pm UK time — though he stopped short of naming the country or disclosing any specifics.
The expected accord is one of 17 deals the US administration has been negotiating in a bid to scale back its wider tariff strategy. While the news has buoyed market sentiment, investors remain focused on how far the White House is prepared to reverse course and whether this sets a precedent for further deals with other nations. The timing of the announcement also adds to market optimism ahead of US-China talks due to take place this weekend in Switzerland.
Elsewhere, the UK signed a significant trade agreement with India on Tuesday — its most substantial post-Brexit deal to date — aimed at reinforcing global trade links in the face of disruption sparked by the US tariff drive.
BoE Rate Cut Baked In, Attention Turns to Guidance
The Bank of England is widely expected to cut the Bank Rate by 25 basis points today, lowering it from 4.5% to 4.25%. Market consensus points to an 8–1 split on the Monetary Policy Committee, with dovish member Swati Dhingra potentially advocating for a larger 50bp cut. This would mark the fourth reduction since August, as the Bank responds to a weakening growth outlook and subdued inflationary pressures driven by the global trade fallout.
With the move already priced in, markets will focus more intently on the Bank’s forward guidance. Investors will be keen to see whether policymakers support the nearly four quarter-point cuts currently anticipated by markets through 2025. The MPC may drop its previous ‘gradual’ stance — one cut per quarter — in favour of more flexibility, especially in light of increasing economic and geopolitical volatility following the Trump administration’s trade actions.
Recent data has shown stronger-than-expected UK GDP growth, with upward revisions to late 2024 and a positive surprise in Q1 2025. This rebalancing suggests 2025 growth forecasts could be lifted from 0.6% to 1.1%. However, growth in 2026 may be revised down due to tariff-related risks. Meanwhile, the inflation outlook is likely to be downgraded, as recent CPI readings have undershot previous expectations and falling energy prices are expected to exert further downward pressure. That said, services inflation remains persistently high, hovering around 5%.
The risks for GBP/USD are tilted to the downside if the BoE strikes a more dovish tone — especially as easing US trade tensions may lend support to the dollar. Although the pound has rallied by around 7.5% over the past three months, much of this reflects general dollar weakness rather than robust sterling fundamentals. Indeed, the Pound Index — which measures sterling’s performance against a basket of the UK’s key trading partners — has risen by just 2.3% over the same period.
From a seasonal perspective, the pound may struggle to sustain its recent gains: following a strong April, May has historically delivered average returns of -0.5% for GBP/USD.
