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GBP/USD’s recovery will likely stall around 1.25, its significant resistance level this year. The GBP’s gain in the past two sessions was largely driven by the USD’s downward correction following the 30-day delay in Trump’s tariffs on Canadian and Mexican imports into the US. However, hopes for a similar de-escalation in US-China trade tensions faded after US President Donald Trump cancelled his phone call with China President Xi Jinping. This came in response to China’s retaliatory tariffs, which take effect on February 10, countering Trump’s 10% tariffs on Chinese imports on Tuesday.
We remain cautious about the optimism for the UK to avoid US tariffs. While the US does not have a goods trade deficit with the UK, it does have a significant services deficit. Trump’s recent comments – calling the UK “out of line” despite describing the UK’s trading relationship with the US as “fair and balanced” – suggested that negotiations may be needed to avoid tariffs. However, the UK’s stagnant economy remains vulnerable to Trump targeting tariffs on the fragile EU economy, which is the UK’s largest trading partner.
Against this background, the Bank of England will likely lower the bank rate by 25 bps to 4.50% at its February 6 meeting. This move would bring the UK’s policy in line with the upper bound of the Fed Funds Rate. We will look for signals on whether the UK aligns more closely with the dovish European Central rather than the cautious Fed in its policy outlook.
The markets have not lowered their guard about fiscal slippage risk from UK Chancellor Rachel Reeve’s October Budget. Although the 10Y Gilt yield eased to 4.52% from its 4.89% peak in mid-January, it remained above the 4.35% level seen before the budget announcement. The Office for Budget Responsibility (OBR) is expected to downgrade its 2% growth forecast for 2025 – which stands well above the 1.2% consensus – in the upcoming Spring Budget Statement next month. Markets will keep worrying about a weaker UK growth outlook amid higher borrowing costs shrinking the GBP9.9bn fiscal buffer, putting the government’s ability to meet its self-imposed fiscal rules at risk.
Quote of the Day
“Hope is a good breakfast, but it is a bad supper.”
Francis Bacon
February 5 in history
The United States and the United Kingdom signed treaty for Panama Canal in 1900.
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