UK-US Trade Deal: More Symbolic Than Substantive
The recently concluded UK-US trade agreement marks the first such accord since President Trump commenced his second term in office this January, following the introduction of widespread tariffs in April. While the deal carries symbolic weight, particularly in light of these developments, we believe it reinforces the broader narrative: tariff barriers are unlikely to be dismantled any time soon. Nevertheless, markets have responded positively. The US dollar has emerged as the main winner in the foreign exchange space, with GBP/USD relinquishing earlier gains to settle nearer $1.32. Sterling, meanwhile, strengthened across most major currencies, briefly climbing above €1.18 against the euro and surging over 1% against the yen, although a portion of these gains faded overnight.
The finer points of the trade agreement remain subject to negotiation over the coming weeks, but the framework has begun to take shape. The UK’s steel and aluminium sectors will see the removal of previously imposed 25% tariffs. Automotive trade appears to be the focal point: the first 100,000 UK-manufactured vehicles imported into the US annually will face a 10% tariff, with volumes beyond that threshold incurring a 25% levy. While this marks an improvement on the blanket 25% tariff applied to foreign cars, UK manufacturers are still at a relative disadvantage compared to pre-deal conditions.
Importantly, 10% tariffs remain in place for the bulk of UK goods entering the US market, underscoring our view that this agreement is not indicative of a broader retreat from protectionist policy. Given that the US posted a $12 billion goods trade surplus with the UK in 2024, Britain’s limited negotiating success may signal even tougher terms ahead for nations running trade deficits with the US.
Federal Reserve Playing It Safe Amid Stagflation Concerns
The Federal Reserve continues to adopt a cautious, data-dependent approach, opting to observe economic developments rather than act pre-emptively. Unlike in 2019, when early intervention was a hallmark of Fed policy, officials are presently downplaying stagflation risks—at least in public. However, inflationary pressures may already be brewing beneath the surface, with ISM manufacturing price trends pointing to a possible uptick in input costs in the coming weeks, even as volatile short-term data clouds the picture.
Investor sentiment remains upbeat. US equities surged on Thursday, buoyed by optimism surrounding potential tariff relief. The White House is touting the UK trade agreement and upcoming talks with China as evidence of progress in the trade arena. The S&P 500 and Nasdaq 100 both advanced more than 1%, recouping earlier losses and reaching their highest levels since March. That said, the core 10% tariff remains untouched—suggesting that elevated trade barriers are likely to persist. While the deal offers some preferential access for UK-made vehicles and partial tariff relief for steel and aluminium, the UK has reciprocated by opening its markets to approximately $5 billion worth of US exports, including agricultural goods, chemicals, and industrial machinery.
A key question remains: are markets getting ahead of themselves? Sentiment is certainly strong, but the longer-term economic impact of sustained tariffs is far from clear. Whether current optimism can carry markets through the summer remains to be seen.
The US dollar, which had previously lagged the rally in risk assets, rebounded this week on renewed trade optimism, pushing back above the 100 mark for a second consecutive session. Gains were most pronounced against the yen and Canadian dollar. However, upside against sterling was muted, as the Bank of England (BoE) delivered a widely expected rate cut while maintaining a surprisingly hawkish tone.
Mixed Signals from the Bank of England
As anticipated, the Bank of England reduced interest rates by 25 basis points to 4.25%, signalling the potential for further easing in the months ahead. However, the policy message was muddied by an unusual voting split within the Monetary Policy Committee (MPC): five members backed the cut, two advocated for a more aggressive 50bp reduction, and two opted to maintain the rate at 4.5%.
This divergence surprised markets, which had largely anticipated an 8-1 vote. The unexpected hold votes sparked a modest hawkish response, with gilt yields rising and GBP/USD edging back towards its 100-day moving average of $1.3337—although the rally was dampened by increased demand for the US dollar following the trade deal news.
The key takeaway from this three-way split is a heightened sense of uncertainty surrounding the UK’s monetary policy outlook. Such divisions often reflect the complex balancing act central banks face when inflation dynamics and growth prospects are shifting simultaneously. The meeting minutes outlined two plausible paths: one in which wage and price pressures prove more persistent, and another where inflation subsides more rapidly. Policymakers noted “substantial” progress in curbing inflation, alongside signs of slowing growth, softer labour market conditions, and a likely marked deceleration in pay increases over the remainder of the year.
Given the pushback against faster rate cuts, we continue to expect a measured easing cycle, with 25bp cuts likely in August and November, bringing Bank Rate to 3.75% by year-end.
