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.

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.

US Dollar Softens Ahead of Crucial Fed Announcement

The US dollar continued to lose ground on Wednesday, with both the pound and the euro gaining in strength. The GBP/USD pair edged closer to its highest levels in three years, while EUR/USD also made notable gains as traders positioned themselves ahead of the Federal Reserve’s much-anticipated policy announcement later this evening.

The Fed is widely expected to maintain interest rates within the current range of 4.25% to 4.50%, according to a Bloomberg poll of 94 analysts — all of whom forecast no change. Any deviation from this consensus would be considered highly unexpected.

Nevertheless, any indication that rate cuts may be on the horizon could put further downward pressure on the dollar. Recent remarks from Fed officials reflect a divided stance, with some concerned about inflation risks linked to tariffs, while others are increasingly wary of a weakening labour market.

The US Dollar Index slipped to its lowest level in a week overnight and now sits just 1.3% above the three-year low. The Fed’s decision is scheduled for 7:00pm BST, followed by a press conference with Chair Jerome Powell at 7:30pm.

Sterling Nears Key Levels as Trade Developments Emerge

Sterling’s gains also come amid signs of a potential breakthrough in trade relations. The Financial Times reports that the UK and US are close to finalising a deal that would ease tariffs on British steel and automotive exports by introducing more favourable thresholds.

This follows news of a trade agreement between the UK and India. Per the BBC, bilateral trade between the two nations reached £41 billion last year, and the British government anticipates this figure could grow by a further £25.5 billion annually by 2040 under the new deal.

Technically, GBP/USD is approaching resistance at its three-year high. Despite the possibility of a short-term pullback, the pair remains above key moving averages, suggesting any dips may be temporary and part of a broader upward trend. Provided the current momentum holds, a move towards 1.3559 could be on the cards.

However, a failure to find support at the 21-day EMA (1.3248) or the 50-day EMA (1.3069) may lead to a more prolonged correction.

EU Considers Retaliatory Tariffs Amid Trade Tensions

On the European front, trade tensions with the US may escalate. According to Bloomberg, the European Union is weighing retaliatory tariffs worth approximately €100 billion on American goods, should ongoing trade talks fail to produce a mutually acceptable outcome.

Sources suggest the European Commission will present a formal proposal to US officials this week. Member states are expected to receive notification of the proposed measures as early as Wednesday, with a month-long consultation period to follow before any final decisions are made.

Meanwhile, EUR/USD has climbed close to the upper boundary of its Bollinger Bands, suggesting overbought conditions may be developing. Key support for the pair remains at the 21-day EMA of 1.1278.

Bank of England Outlook Dampens GBP/EUR Sentiment

The British Pound remains under pressure against the Euro as markets brace for the Bank of England’s monetary policy decision on Thursday. The GBP/EUR exchange rate has stalled below the 1.18 level, despite a modest recovery in late April fuelled by easing global risk aversion and a temporary improvement in investor sentiment following softer rhetoric from U.S. President Donald Trump.

This recovery appears to have lost momentum, however, with GBP/EUR now drifting lower amid rising concerns over economic stagnation in the UK. The pair has proven highly sensitive to global equity volatility, and with markets now in a holding pattern ahead of new trade developments between the U.S. and China, the support from fading volatility has evaporated.

Technical indicators signal a short-term downtrend, with a risk of a more significant move lower should the Bank of England adopt a dovish tone. Expectations are rising that the Bank will cut interest rates this week and indicate the likelihood of a follow-up move in June. This would mark a shift from the current pace of quarterly cuts, potentially triggering a sharper reaction in currency markets. A break below the 1.1708 support level would pave the way for a decline toward 1.16.

The latest S&P PMI survey underscores the economic fragility, with April's composite index slipping to 48.2 — signalling contraction for the first time in over two years. The economic drag is attributed in part to fiscal tightening measures, including higher employer National Insurance Contributions and a minimum wage hike. While inflation pressures remain persistent, the Bank appears committed to its view that inflation will fall back to 2.0% in 2026, allowing it to focus on supporting growth.

GBP/USD: Consolidation Before the Next Leg Higher

The Pound has held its ground against the U.S. Dollar, even as the broader USD weakens amid continued domestic political uncertainty and a lack of conviction from market participants. GBP/USD reached a recent high at 1.3441 before entering a period of consolidation, finding strong support at 1.3234. This area has so far held firm, affirming the prevailing uptrend.

Despite mixed economic signals from both sides of the Atlantic, market sentiment remains broadly supportive of GBP/USD. A lack of significant U.S. data releases this week and underwhelming follow-through on last week's strong U.S. jobs report suggest the Dollar is lacking upward momentum. President Trump's unpredictability continues to inject uncertainty into markets, particularly around trade and fiscal policy.

The Bank of England’s upcoming policy decision could introduce short-term volatility, especially if a more aggressive easing cycle is hinted at. However, downside in GBP/USD may be limited due to rising inflation expectations, which could temper the BoE’s dovish stance. Should the Bank revise its inflation forecasts higher, this could offer a counterbalance to rate cut expectations and help Sterling recover.

Furthermore, easing energy prices are expected to reduce future inflationary pressures, adding complexity to the Bank’s policy balancing act. In the bigger picture, continued weakness in the U.S. Dollar — driven by long-term structural concerns and trade headwinds — supports the outlook for a renewed push toward and beyond 1.3440 once current consolidation resolves.