The British currency faced significant pressure this week, driven by new tariff threats from US President-elect Donald Trump.
However, the pound managed to resist, closing yesterday with a slight gain of 0.1%, standing at $1.2587. This behavior reaffirms its character as a “risk-sensitive” currency, which responds quickly to changes in the global economic landscape.
Trump’s tariffs shake markets
On Monday night, Trump announced a 25% tariff on imports from Canada and Mexico. This movement seeks to pressure both countries to combat drug trafficking, especially fentanyl, and reduce the crossing of migrants at the border.
We see in the weekly chart of the GBPUSD Forex PAR how the pound has depreciated against the dollar for a few hours. At the time of writing this article it is trading at 1.2556. Source: Yahoo Finance
Likewise, Trump plans to impose an additional 10% tariff on Chinese products, intensifying trade tensions.
These announcements caused strong movements in the currency market. The dollar index initially rose, although it later lost some of its gains. On the other hand, the Canadian dollar and the Mexican peso registered falls of 1% and 2%, respectively.
The pound facing uncertainty
Despite the unstable global context, the pound showed notable performance. His initial reaction was negative, reflecting his usual sensitivity in times of economic uncertainty. However, it subsequently regained ground, standing out among the major global currencies.
Derek Halpenny, currency strategist at Japanese bank MUFG, attributes this stability to the limited trade surplus between the United Kingdom and the United States. According to Halpenny, Britain’s surplus with the United States amounts to just £4.6 billion. This figure reduces the probability that Trump will focus his trade policies on the bilateral relationship between both countries.
Potential impact on the Eurozone and the United Kingdom
Although the pound managed to hold firm, the potential consequences of a prolonged trade conflict should not be underestimated. Tariff measures against the eurozone could indirectly affect the British economy. This would occur through a slowdown in global and European growth, which would put additional pressure on the pound.
“Escalating trade tensions could weaken global economic growth,” Halpenny warned. “If this happens, the pound is likely to suffer further declines.”
On the domestic front, the pound hit a six-month low of $1.2475 last Friday. This drop followed the release of weak UK retail sales data, which raised expectations of deeper interest rate cuts from the Bank of England.
The recent strength of the dollar has also put pressure on the pound. Since Trump’s victory, the dollar has been on an upward trend. This is due, in part, to expectations that US tariffs will continue to support the US currency in the future.
Scenarios for 2024
Looking ahead to next year, analysts believe the pound will face significant challenges. While the limited trade surplus with the United States could protect it from new bilateral tensions, global risks remain elevated.
The evolution of the trade conflict between the United States, China and other economies will be key. An environment of greater economic uncertainty could dampen appetite for risk assets, negatively affecting the pound.
In contrast, a favorable resolution in trade negotiations could provide some relief to risk-sensitive currencies such as the pound. Furthermore, the Bank of England’s monetary policy decisions will play a crucial role in the performance of the British currency.
Conclusion
Despite turbulence in global markets, the pound has shown remarkable resilience.
However, external and internal risks remain present, and their future will depend on how trade tensions and economic policy decisions unfold.
For investors, this backdrop underlines the importance of closely monitoring international developments and key UK economic metrics. Only then will they be able to make informed decisions in an increasingly uncertain environment.
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