The US trade surplus with the UK reduces the risk of trade conflict between the two countries and makes the GBPUSD pair more attractive to investors. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- Risks of the US imposing tariffs against the UK are low.
- The Bank of England is expected to act more quickly than the US Fed.
- The repo rate will fall to 4.5%.
- Consider selling the GBPUSD pair and buying it on the rebound from 1.2355 and 1.2265.
Weekly Fundamental Forecast for Pound Sterling
The British pound has proven the most resilient in the face of Donald Trump’s tariffs among the G10 currencies, with the exception of the yen. Britain’s balanced trade with the US is a key factor in its resilience, ensuring it is not targeted by the White House. Additionally, the American president’s affinity for Brexit and his Scottish roots have further bolstered the relationship between London and Washington, reducing the likelihood of any negative repercussions for the British pound and boosting the GBPUSD exchange rate.
G10 Currencies’ Reaction to US Tariffs
Source: Bloomberg.
In 2023, the US had a foreign trade surplus with the UK of $14.5 billion, according to US data. In contrast, UK statistics indicate a surplus of £71.1 billion with the US. The discrepancy is attributable to the inclusion of trade with the semi-autonomous islands. Still, the White House is expected to prioritize the US figures due to the fact that London is not subject to tariffs, which increases the prospect of business investment compared to continental Europe.
On the other hand, the UK is between a hammer and a hard place: the EU demands unity to fight an external enemy, but London is in no hurry to do so. However, Britain has always preferred the middle ground. Its economy in 2024 grew faster than the IMF’s 0.6% expected at the beginning of last year. The expansion has outperformed the eurozone but lagged behind the US, allowing the Bank of England to implement rate cuts with great caution.
Markets anticipate a further reduction from 4.75% to 4.5% at the February 6 meeting. This has been reflected in GBPUSD quotes, so investors will focus on the accompanying statement and updated forecasts. It is likely that GDP forecasts will be revised downwards, while inflation forecasts are expected to be revised upwards. This supports the notion of a stagflationary backdrop, which is likely to compel the Bank of England to adopt an extremely cautious approach. At the end of 2024, Andrew Bailey indicated four repo rate cuts in 2025, but market expectations suggest three reductions.
Market Outlook on the Bank of England’s Repo Rate
Source: Bloomberg.
In the context of two anticipated acts of monetary policy easing by the Federal Reserve, the prevailing sentiment indicates a downward trend. However, the Forex market is more focused on Donald Trump’s tariff threats than central bank rates.
The market is overly optimistic that the duties will be averted through concessions. Despite not fully implementing his threats during the first tenure, frequently abandoning them, Donald Trump initiated a trade war with China that was ultimately won by the US.
Weekly GBPUSD Trading Plan
In the short term, the GBPUSD pair may face elevated volatility if the Bank of England gives dovish signals and the US employment statistics disappoint. In such an event, one can open short trades if the pair plunges below 1.245 and initiate long trades on a rebound from 1.2355 and 1.2265.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of GBPUSD in real time mode
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