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28 Jan 2025
GBP/USD drops below 1.2500 due to dovish BoE, Trump tariff plans
- GBP/USD depreciates as the BoE is widely anticipated to deliver a 25 basis point rate cut in February.
- The US Dollar rises as President Trump plans to impose tariffs on imports of multiple products.
- Trump stated that he wants “bigger tariffs” than “2.5% universal tariffs on US imports,” proposed by Treasury Secretary Scott Bessent.
The GBP/USD pair halts its three-day winning streak as the British Pound (GBP) faces headwinds due to growing market expectations of a near-certain rate cut by the Bank of England (BoE) to 4.5% at its upcoming meeting. During Tuesday's Asian session, the pair trades around 1.2440.
Soft economic data from the United Kingdom (UK)—including weaker inflation, retail sales, labor market figures, and sluggish GDP growth in December—has strengthened the case for a 25 basis point rate cut by the BoE in February.
Meanwhile, the US Dollar Index (DXY), which measures the US Dollar (USD) against a basket of six major currencies, hovers near 108.00. Market participants are likely to monitor key US economic releases later in the day, including Durable Goods Orders, the Conference Board’s Consumer Confidence Index, and the Richmond Fed Manufacturing Index.
The US Dollar has gained traction following President Donald Trump’s tariff announcements on Monday evening. Trump proposed tariffs on imports of computer chips, pharmaceuticals, steel, aluminum, and copper to encourage domestic manufacturing.
Treasury Secretary Scott Bessent also proposed introducing universal tariffs on US imports, starting at 2.5%. However, Trump stated he favors “much bigger” tariffs than the initial proposal.
Uncertainty surrounding the economic implications of Trump’s trade and immigration policies has prompted the Federal Reserve (Fed) to adopt a cautious approach ahead of its policy decision on Wednesday, which could lend additional support to the Greenback.
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.