03 Feb 2025

• The Pound Sterling performs strongly among risk-sensitive currencies on expectations that the UK won't face hefty tariffs from the US.
• Market sentiment turns risk-averse after US President Trump imposes tariffs on Canada, Mexico and China.
• The BoE is expected to cut interest rates by 25 bps to 4.5%.
• The Pound Sterling (GBP) demonstrates superior performance against its major counterparts, with the exception of safe-haven currencies such as the US Dollar (USD) and the Japanese Yen (JPY), on Monday. This uptick in confidence among investors stems from the belief that the United Kingdom (UK) is unlikely to encounter significant tariffs from the United States (US).
  
  Over the weekend, US President Donald Trump imposed a 25% tariff on imports from Canada and Mexico, along with a 10% tariff on goods from China. Trump had previously indicated his intention to increase tariffs on North American allies due to issues related to illegal immigration and the influx of the opioid fentanyl. While he has also threatened to levy tariffs on European nations, his stance towards the UK has been comparatively lenient, suggesting that while tariffs could be imposed, he is optimistic about reaching an agreement, particularly praising Prime Minister Keir Starmer for his amicable approach. This development has enhanced the attractiveness of the Pound Sterling among currencies sensitive to risk.
• Investors are turning their attention to the upcoming monetary policy decision from the Bank of England (BoE), which is set to be revealed on Thursday.
  
  Market expectations indicate that the BoE is likely to lower interest rates by 25 basis points (bps), bringing the rate down to 4.50%. Among the nine members of the Monetary Policy Committee (MPC), it is anticipated that seven will support this reduction, while two members are expected to advocate for maintaining the current rates. Notably, BoE policymaker Catherine Mann, known for her hawkish stance, is predicted to be among those opposing the rate cut.
  
  The confidence in a potential rate reduction stems from a noticeable decline in inflationary pressures within the United Kingdom (UK) and increasing concerns regarding softening labor demand. The core Consumer Price Index (CPI) in the UK, which excludes the prices of volatile items such as energy and food, fell to 3.2% in December. Additionally, labor market data for the three months ending in November revealed an increase of 35,000 new jobs, although hiring has slowed as business owners reacted to Chancellor of the Exchequer Rishi Sunak's announcement regarding an increase in employers' contributions to National Insurance (NI).
  
  On the economic front, the revised estimates for the S&P Global/CIPS Manufacturing PMI were reported at 50.1, consistent with the flash reading.