Pound Sterling weakens against US Dollar as trade jitters resurface ahead of tariff deadline
- The Pound Sterling slides to near 1.3600 against the US Dollar as markets focus on any trade deals ahead of the July 9 deadline for US tariffs.
- Trump prepares to send letters to those nations that have failed to ink a trade pact, specifying tariff rates.
- Higher UK welfare spending bill will need tax raise or spending cuts going forward.
The Pound Sterling (GBP) drops to near 1.3600 against the US Dollar (USD) during European trading hours on Monday. The GBP/USD pair declines as the US Dollar trades calmly, with investors awaiting trade-related headlines in the countdown to the United States (US) tariff deadline on July 9.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades 0.15% higher at near 97.15.
US Treasury Secretary Scott Bessent expressed confidence in an interview with CNN over the weekend that Washington will announce several deals in a couple of days. “There’s a lot of foot dragging on the other side, and so I would expect to see several big announcements over the next couple of days,” Mr. Bessent said. “We’re going to be very busy over the next 72 hours,” he added.
So far, Washington has announced bilateral agreements with the United Kingdom (UK) and Vietnam and a limited trade pact with China. On July 2, the US expressed confidence that it would close a deal with India in 48 hours, but such an agreement has not been confirmed yet.
Meanwhile, investors should brace for volatility as the US is prepared to send letters to those nations that have not signed a deal with Washington during the 90-day tariff extension.
Over the weekend, Trump said the first batch of letters outlining the tariff levels they would face on exports to the United States would be sent to 12 countries on Monday, Reuters reported.
Daily digest market movers: Pound Sterling weakens amid mounting fiscal risks
- The Pound Sterling trades lower against its major peers, except antipodeans, at the start of the week. The British currency remains under pressure due to the fresh escalation in United Kingdom (UK) fiscal risks. The increase in the welfare spending bill by the administration has raised the likelihood of an announcement of a tax increase in the Autumn Budget.
- Last week, UK Chancellor of the Exchequer Rachel Reeves broke her self-imposed fiscal rules and increased the standard allowance to the Universal Credit, a move that is expected to accelerate the financial burden by £4.8 billion by fiscal year 2029-2030.
- According to a report from Barclays, the UK administration will likely necessitate tax increases in the Autumn Budget in the face of mounting fiscal challenges.
- On Thursday, Chancellor Reeves said in an interview with BBC that the administration will have to bear the cost of the increase in welfare spending. However, she didn’t clarify whether the government will raise taxes or cut spending. “Of course, there is a cost to the welfare changes that Parliament voted through this week and that will be reflected in the Budget," Reeves said.
- On the economic front, monthly Gross Domestic Product (GDP) and factory data for May, to be published on Friday, will be key triggers for the Pound Sterling.
- Before that, Bank of England (BoE) Deputy Governor for Financial Stability Sarah Breeden is scheduled to speak at the Annual Chapman-Barrigan lecture series on Thursday. However, she is unlikely to speak on the monetary policy outlook and inflation.
- The next monetary policy announcement by the BoE is on August 7, with markets expecting another 25 basis points interest-rate cut to 4%, according to analysts at Deutsche Bank. The bank also expects the BoE to deliver two more interest rate cuts in November and December.
Technical Analysis: Pound Sterling falls to near 20-day EMA
The Pound Sterling slips to near the round level of 1.3600 against the US Dollar on Monday, which coincides with the 20-day Exponential Moving Average (EMA).
The 14-day Relative Strength Index (RSI) falls to near 50.00, suggesting 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.
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