A modest 10% duty on imports from the UK allowed asset managers to view the British pound as a safe haven, offering a degree of protection against the trade war. However, the US’s negotiating stance has changed all that. Let’s discuss this topic and make a trading plan for the GBPUSD pair.
The article covers the following subjects:
Major Takeaways
- 90-day tariff delays deprive the pound of its advantage.
- Elevated volatility prevents traders from using the pound in carry trade strategies.
- UK GDP will grow slower than eurozone GDP.
- Short trades on the GBPUSD pair can be opened on a rebound from 1.291.
Weekly Fundamental Forecast for Pound Sterling
Investment management firm Vanguard, which has $1.8 trillion under management, anticipates the pound will reach 1.4 by the close of the year, given Britain’s reduced exposure to the risks of trade wars when compared to Europe and other regions. This forecast is higher than the Bloomberg consensus estimate and other major financial institutions’ predictions. However, GBPUSD bulls have not performed as well to date. What factors might be restraining them?
Demand for Pound-Dollar Vanilla Calls
Source: Bloomberg.
Following America’s “Liberation Day,” the White House’s 10% tariff on imports from the United Kingdom appeared to offer a clear advantage for the pound sterling. The European Union was slammed with 20% tariffs. Investors contemplated whether the UK should be regarded as a safe haven. Subsequent events have indicated that this is not the case.
The decision by Donald Trump to introduce 90-day tariff delays for negotiations with various countries removed the primary advantage held by GBPUSD bulls. In a world where everyone is on a level playing field, why buy the pound against the euro? This is particularly relevant given the potential for the eurozone economy to accelerate, driven by Germany’s fiscal stimulus. The UK, with its budgetary shortcomings following the Conservative administration’s policies, is unlikely to keep up with the currency bloc.
The GBPUSD pair is under pressure from the uncertainty surrounding the US policy, which has spurred market volatility to unprecedented levels since 2022. As a result, the British currency’s role in carry trade transactions has diminished.
Forex Volatility Index
Source: Bloomberg.
The GBPUSD pair also faces pressure from the Bank of England’s decision to reduce the repo rate in May, following a pause in March. Meanwhile, the Fed is comfortable with the federal funds rate at 4.5%. The derivatives market estimates a similar scale of monetary expansion from Washington and London in 2025, but the significance lies in which regulator will make the first step.
The primary catalyst for the GBPUSD rebound from the one-month low is the resurgence of interest in European equity indices, driven by Donald Trump’s renewed commitment to negotiate. Investors are beginning to favor the view that tariffs are not permanent. This suggests that the White House may be open to the idea of eliminating tariffs and embracing free trade, resulting in a duty-free trade environment.
However, it is unlikely that this issue will be resolved in the near future. Other countries are expected to respond with less than enthusiastic offers, which may result in rejections, limiting the enthusiasm of GBPUSD bulls. This is particularly relevant in the context of increased Forex volatility.
Weekly GBPUSD Trading Plan
The strategy of selling the pound sterling on a rebound from 1.3025 has been successful. The subsequent trajectory of the GBPUSD pair will depend on whether bulls will be able to push the quotes above the resistance level of 1.292. A rebound from this key level and a decline below 1.2835 could prompt further selling. Conversely, a successful test of this resistance would be a signal to buy the British currency.
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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