President Trump doubled down on his threat to impose 25 percent tariffs on Mexico and Canada on March 4, as well as additional tariffs on China.
Risk appetite has fallen sharply in the wake of the recent rhetoric that hurt the pound in global markets, especially with sharp losses for equities, and high volatility will continue. Important domestic developments have also occurred with the Bank of England’s key official in overcoming inflation declining.
The GBP/USD exchange rate fell to a one-week low of around 1.2575 before settling at just under 1.2600.
ING Bank remains negative on the GBP outlook; “Later in March, a renewed focus on the UK’s domestic story – and potential government spending cuts – could see GBP/USD back to 1.22/23.”
Trade talks were more negative for the euro as the GBP/EUR hit a two-month high above 1.2130 before pulling back to 1.2110.
Last month, Trump extended the tariff deadline and there is an inevitable expectation that there will be another delay or last-minute deal. ING Bank noted that “of course we have been here before and there are still four days to seal deals.”
Trump, who is also scheduled to speak at a joint session of Congress on Tuesday, adds a huge political element. There is a strong chance of a rebound in the GBP/USD pair if there is a deal or another extension of the deadline.
However, if tariffs continue, the pair will be subject to further selling, although GBP/EUR could rise further. He stated that a gradual and cautious approach is necessary to cut interest rates, but inflation concerns will raise the ceiling for supporting further cuts.
GBP Outlook and Inflation Effects
The rapid decline of the British pound (GBP) against the US dollar (USD) may continue; oversold conditions indicate that any decline is part of the lower range of 1.2570/12640. In the longer term, the two-week strength has ended; for now, it is likely to trade between 1.2520 and 1.2670, according to UOB Group forex analysts Quick Sir Liang and Peter Sheaf.
The strength of the pound sterling ended for two weeks
24-hour outlook: “Yesterday, we expected the pound to trade between 1.2640 and 1.2700.” “The pound later rose to 1.2689, and then suddenly fell during the New York session to 1.2598. Oversold conditions suggest that any decline will likely remain within the lower range of 1.2570/1.2640, even if the decline stretches. In other words, GBP is unlikely to break clearly below 1.2570.”
1-3 week outlook: “We revised our view to positive two weeks ago on February 14, when the pound was at 1.2560. Following the progress, yesterday (February 27, spot price at 1.2670) we noted that “bullish momentum slowed further, and a breakout of 1.2615 would indicate that GBP is not strengthening further.” “Sterling then breached the 1.2615 level, signaling the end of the GBP’s strength. Current price movements are likely to be part of the range trading phase. At the moment, we expect to trade between 1.2520 and 1.2670.”
Bank of England Deputy Governor Ramsden stated that the risks of reaching the 2% inflation target are no longer only negative but are now two-sided..
He added that there is a higher degree of uncertainty surrounding both the labor market and the economy as a whole. He also sees troubling evidence about developments in wages.
Inflation concerns and their impact on markets and the Bank of England
There remains an important risk that uncertainty and shifts in attitudes may have a broader negative impact on confidence in global markets with a more defensive stance.
Nomura strategist Yusuke Miyari commented, “Markets have become ‘satisfied’ with tariff risks. It has become clear that Trump’s position on the implementation of strict tariff measures remains in place.”
Business talk tended to dominate, but there were important comments from a key Bank of England official (BoE).)
Bank of England Deputy Governor Ramsden stated that the risks of reaching the 2% inflation target have shifted from being solely negative to two-sided.
He added that there is a higher degree of uncertainty surrounding both the labor market and the economy as a whole. He also sees troubling evidence about developments in wages. Also he stated that a gradual and cautious approach to cutting interest rates is necessary, but inflation concerns will limit further cuts.
The Lloyd’s Business Index rose to 49% in February from 37% in January, recovering from seven consecutive declines. Companies grew more optimistic about the outlook and gained increased confidence in boosting employment.
The Bank of England is likely to consider pricing with 67% of companies expecting to raise prices over the next year compared to 61% in the previous survey. Pricing forecasts are likely to reinforce concerns about inflation trends.
America will release the latest core PCE price index, which is the Federal Reserve’s preferred measure of inflation.
The index is expected to fall from 2.8% to 2.6% in January and may lead to increased bets on a rate cut by the Fed if the data comes in as expected.
