During Wednesday's early Asian trading session, the British pound strengthened against the US dollar for the second consecutive day, moving closer to the 1.2850 mark. The GBP/USD pair's upward trend is a result of improving sentiment around the world, as former US President Donald Trump's comments suggested a more relaxed stance on international trade talks.
On Tuesday, the US Customs and Border Protection agency declared that it is ready to begin levying country-specific tariffs on 86 trading nations. Trump's most recent remarks, however, suggested a more accommodating posture and a readiness to engage in open communication with important trading partners. This has raised optimism about a possible reversal of the rising trade tensions.
At the same time, Federal Reserve representative Austan Goolsbee reiterated the significance of using data to guide interest rate decisions. Although most forecasts still call for a July move, market participants are increasingly placing bets on a 25 basis point rate cut as early as May, according to the CME FedWatch Tool. Prior to year-end tensions, rate cuts totalling more than 100 basis points are being priced in.
The rising UK 10-year gilt yield, which reached about 4.61%, also helped to support sterling. After US Treasury Secretary Scott Bessent confirmed that about 70 nations, including Japan, have contacted the US to discuss trade terms, optimism increased. As a result, risk sentiment increased and the value of the pound rose even more.
Since only around 10% of the UK's exports are subject to the impacted tariffs, the country may be better equipped to withstand trade disruptions. The impact might be lessened by this comparatively small exposure as well as the potential for new business from US buyers looking for other suppliers. According to estimates from the UK government, the overall GDP impact might be less than 0.1%.
Expectations for rate cuts by the Bank of England have increased due to the uncertainty surrounding international trade. With up to three rate cuts anticipated by the end of 2025, markets are now fully pricing in a rate cut in May, up from 50% odds earlier this week.
The recent shift in trade sentiment and central bank expectations has injected fresh momentum into the GBP/USD pair. With the Pound riding high on hopes of negotiated tariffs, stronger gilt yields, and a potential rate cut by the BoE, the coming weeks could bring further movement in currency markets. However, with global uncertainties still looming, traders should stay informed and ready to adapt. Keeping a close watch on policy updates and economic indicators will be key to navigating the ever-changing forex landscape.
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