Pound’s Recovery at Risk as Bank of England Signals Rate Cuts

The British Pound’s recent rebound against the Euro, Dollar, and other major currencies faces potential pressure today as the Bank of England prepares to lower interest rates and signal a continued easing cycle.

Markets anticipate a 25-basis-point cut to the Bank Rate, with expectations of two additional cuts in 2025. However, policymakers are likely to commit to at least three further cuts to maintain a steady quarterly pace. A shift in market expectations toward deeper rate reductions would put downward pressure on UK bond yields and Sterling, limiting its recent recovery. Currently, GBP/EUR stands at 1.2020, up from a mid-January low of 1.18, while GBP/USD has risen from 1.2099 on January 13 to 1.2485.

A majority of the Monetary Policy Committee (MPC) is expected to vote in favour of the rate cut, with Catherine Mann likely to dissent and support keeping rates at 4.75%. The decision follows December’s UK inflation data, which showed CPI rising 2.5% year-over-year, down from 2.6% in November and below the 2.7% forecast.

Alongside the rate cut, the Bank of England will release new economic projections, highlighting weaker growth and higher unemployment forecasts—reinforcing its case for continued monetary easing.

French Government Survives No-Confidence Vote, Markets React Positively

The French government successfully withstood a no-confidence vote on Wednesday, clearing the way for the long-delayed annual budget to move forward. While widely expected, this outcome remains a constructive development for markets. The French risk premium—measured by the yield spread between French and German bonds—has eased from its peak of 90 basis points to 70. Meanwhile, French equities have outperformed both U.S. and broader European markets, delivering a 7% gain year-to-date.

Additional support for risk assets could come from the European Central Bank, which is expected to lower rates by 87 basis points this year. However, the extent of policy easing will depend on U.S. tariff decisions and the pace of European inflation. Investors have tempered their expectations for rate cuts following remarks from ECB Chief Economist Philip Lane, who warned that inflation may take longer to subside than previously projected.

In the currency markets, the euro has extended its rally for a third straight session—its longest winning streak since late October. EUR/USD must break above the 50-day moving average at $1.0420 to maintain upward momentum toward $1.05.

Bond Yields Climb, Safe-Haven Demand Rises, and Dollar Weakens

Rising concerns over the U.S. budget deficit and increasing debt levels have contributed to a higher term premium, driving bond yields upward. However, investor sentiment improved after the Treasury confirmed it would maintain the size of its upcoming bond issuances, providing some stability to the market.

Meanwhile, demand for safe-haven assets spiked following a softer-than-expected ISM services report, which fell from 54 to 52.8. Despite this slowdown, the employment sub-index showed its strongest increase since September 2023, aligning with the robust ADP private payrolls report earlier in the day. This reinforces optimism ahead of Friday’s nonfarm payrolls release.

On the currency front, the U.S. dollar continued to slide as trade-related risk premiums eased. After depreciating against all G10 currencies in the previous session, market focus now shifts to the Bank of England’s policy decision, multiple Federal Reserve speeches, and the latest jobless claims report.

Tariff Uncertainty Lingers as Markets Navigate Policy Shifts

Hopes for trade stability were short-lived as the U.S. granted only a temporary reprieve in its tariff standoff with Mexico and Canada, delaying new levies by a month. While this provided brief relief to markets, the broader uncertainty surrounding U.S. trade policy remains a key risk. Meanwhile, tensions with China have escalated further—after a planned call between Xi and Trump failed to materialize, the U.S. proceeded with a 10% tariff on Chinese imports, prompting Beijing to retaliate with additional levies on 80 products, effective February 10th. All eyes will be on the yuan as Chinese markets reopen after the Lunar New Year break, with traders anticipating a stable or stronger fixing from the People’s Bank of China.

In 2023, China’s exports to the U.S. were valued at around $500 billion, while U.S. exports to China amounted to approximately $124 billion. This trade imbalance has been a key point of tension in U.S.-China economic relations, and the imposition of trade tariffs is likely to escalate the issue. However, given the disparity in exports, China must adopt a measured approach in its response.

The deepening trade rift is adding pressure on the Eurozone, which finds itself caught between the world’s two largest economies. With significant trade links to both, the region faces mounting economic risks.

Despite the uncertainty, the euro found some support as the delay in tariffs for Mexico and Canada spurred buying interest, pushing EUR/USD above $1.0350. While the currency pair is slightly higher on the year, it remains down 3.5% over the past 12 months and 7.3% over the last five months.

On the economic front, today’s stronger-than-expected Eurozone inflation data challenges market expectations of aggressive ECB rate cuts. Inflation accelerated for a fourth straight month, reaching 2.5% in January 2025, while core inflation held firm at 2.7%, exceeding forecasts.

Pound Under Pressure as Growth Concerns Mount and BoE Rate Cuts Loom

The British pound remains on the defensive as weak economic data, persistent inflation worries, and shifting Bank of England (BoE) expectations weigh on market sentiment. While the BoE has maintained a cautious stance, investors are increasingly pricing in rate cuts later this year amid signs of slowing economic growth. Recent data has offered little support for sterling, reinforcing concerns that the UK economy is struggling to gain traction.

Economic indicators continue to highlight softening demand. The latest S&P Global/CIPS UK Services PMI inched up to 51.2 in January from 51.1 in December, slightly exceeding expectations of 50.9. While this suggests modest expansion in the services sector, a drop in new orders for the first time in over a year raises concerns about future momentum.

Despite these headwinds, the pound has regained some ground following the U.S. decision to delay tariffs on Canada and Mexico, which helped ease broader market uncertainty. The UK’s lower exposure to U.S. tariffs, due to its services-heavy export mix, has provided some relief. As a result, GBP/EUR is climbing for a third straight session above €1.20, though GBP/USD remains under pressure, struggling to sustain gains above $1.25.

Tariff Turmoil Fuels Market Volatility

Uncertainty surrounding tariffs is driving sharp fluctuations across asset classes. Over the weekend, the US adopted a tougher stance, triggering a plunge in stocks and cryptocurrencies, a surge in US yields, and a significant rally in the US dollar. However, markets reversed course after news broke that tariffs on Mexico and Canada would be delayed for a month following discussions between leaders on Monday.

The turbulence didn’t stop there—China’s tariff deadline passed, prompting retaliation with levies on US LNG, coal, crude oil, and farm equipment, alongside an antitrust probe into Google. As a result, oil fell by 2%, and the Chinese yuan weakened by 1% against major currencies.

Tariffs remain the dominant market driver, with Trump viewing them as a strategic tool. The key questions now are how much he is willing to negotiate post-implementation and what deals he is prepared to strike. Until more clarity emerges on the duration and scale of these tariffs, volatility is expected to persist—particularly in FX markets. Growth-sensitive and commodity-linked currencies are likely to remain under pressure, while safe-haven demand strengthens the appeal of the Japanese yen and Swiss franc as diversification options beyond the US dollar.

Euro Under Pressure as Trade Risks Mount

The euro’s fortunes took a sharp turn after Trump’s election in November, tumbling from a peak of $1.12 last year to around $1.01. The currency faces mounting headwinds, both political and cyclical. A no-confidence vote in France, expected on Wednesday, adds to the uncertainty, but speculation that the US will restrict trade with the EU is the latest and most pressing threat—one that raises the risk of EUR/USD falling to parity or lower.

Trade tensions have also reinforced the monetary policy divergence narrative, further weighing on the euro. Investors are increasingly betting on aggressive European Central Bank (ECB) rate cuts due to slowing growth, with more than three cuts priced in for 2025. This has sent German bund yields sliding, while expectations for the Federal Reserve have moved in the opposite direction, pushing US Treasury yields higher. As a result, the US-German yield spread is near its widest level in five years, exacerbating EUR/USD weakness.

The key question now is whether markets have fully priced in the trade-risk premium. With EUR/USD only about 2% from where rate differentials suggest fair value lies, the risk remains that a larger premium needs to be factored in, reflecting Trump’s hardline tariff stance.

Unless a reversal in trade policy emerges, EUR/USD could retest its cycle low and move toward the psychologically significant parity level. Market sentiment has turned increasingly bearish, with FX options positioning showing the most pessimistic outlook for the euro in six months, as reflected in one-week risk reversals.

Pound Finds Respite from Tariffs but Risks Remain

Britain appears poised to avoid US tariffs, largely due to its goods trade deficit with the US. While the UK runs a trade surplus in services, these are difficult—if not impossible—to target with tariffs. However, despite this exemption, the pound remains a risk-sensitive currency, and the UK’s heavy exposure to higher interest rates keeps downside risks in focus for GBP/USD. That said, as seen with GBP/EUR’s gap higher on Monday, sterling could outperform its European peers in this escalating tariff environment.

US trade data underscores the rationale behind Britain’s likely exemption. The US runs a goods trade deficit of $209 billion with the EU, $279 billion with China, $152 billion with Mexico, and $68 billion with Canada, but holds a $9.7 billion goods trade surplus with the UK. While this suggests Britain may stay out of the firing line, calling the pound a safe-haven currency remains questionable. The UK is still vulnerable to global trade tensions—especially if a slowdown in the EU, its largest trading partner, weighs on growth. Additionally, the impact of higher interest rates will further strain the Treasury, with rising borrowing costs and limited fiscal flexibility adding to economic pressures.

Sterling could extend gains against the euro toward €1.21–1.22, well above its five-year average of €1.16. However, against the dollar, near-term risks remain tilted lower. If EUR/USD falls to parity, GBP/USD could trend closer to $1.20, given the strong correlation between the two exchange rates.

Markets Brace for Another Pivotal Week Amid Escalating Trade Tensions

This week is shaping up to be another critical one for global markets. Following an eventful stretch that saw the Federal Reserve push back on rate cut expectations and the European Central Bank deliver a widely anticipated cut, the Trump administration has now escalated trade tensions over the weekend with sweeping new tariffs.

The U.S. has imposed fresh levies of 25% on imports from Canada and Mexico, along with a 10% tariff on Chinese goods—without exceptions for consumer products, a departure from Trump’s first presidency. Additionally, the favourable de minimis exemption, which allowed certain low-value imports to bypass scrutiny and tariffs, will be removed.

Trump stated that tariffs on the EU are inevitable. However, he has yet to target the UK directly, likely due to the unique structure of its economy, the dominance of its services sector, and the absence of deeply integrated supply chains with the U.S.

With markets already navigating a fragile macroeconomic landscape, this latest trade dispute injects further uncertainty into the outlook. The newly imposed tariffs now cover nearly half of all U.S. imports, raising the average tariff rate from 3% to 10%. 

Euro Slides as Tariff Risks Mount, Parity in Sight

The euro has tumbled over 1% against the U.S. dollar, slipping into the mid-$1.02 range amid escalating tariff concerns. President Trump reaffirmed that tariffs on the European Union “will definitely happen,” significantly increasing the risk of EUR/USD approaching parity in the near term.

While the EU has pledged to respond decisively to any tariffs, this is unlikely to stop markets from pricing in further policy easing from the European Central Bank (ECB). As a result, German bond yields are expected to decline further, adding pressure on the euro. Although Trump has yet to specify the scope and scale of the tariffs, the uncertainty comes at a particularly fragile time for Europe, with Germany’s national elections looming and France’s new government facing a parliamentary battle over its budget.

With a wave of political risks weighing on the euro, any economic fallout from U.S. tariffs could accelerate its decline, potentially dragging EUR/USD toward its 2022 lows around 0.95 in the months ahead.

BoE Rate Cut Expected, but Market Focus Shifts to Future Policy Path

The Bank of England (BoE) is widely expected to cut interest rates this week, but the key market focus will be on the vote split and policy messaging, which will offer clues on the pace of further easing this year.

December’s meeting signalled a surprisingly dovish shift, with three members voting for consecutive cuts and the majority highlighting concerns over weak output and employment. The UK economy showed signs of stagnation in the fourth quarter, raising fears of a potential technical recession. If the BoE signals a more aggressive easing cycle than markets currently anticipate, it could weigh on the pound through lower yield expectations.