President Donald Trump's early weeks in office have sparked significant shifts in international relations, particularly involving the European Union and China. His administration's strategies are poised to impact the global economic landscape, with potential tariffs targeting the European Union. Despite his focus on Europe, Trump's influence over China appears diminished compared to the previous trade war. Meanwhile, the Bank of England (BoE) prepares for a pivotal monetary policy announcement this Thursday, as markets anticipate a rate cut following a stagnant UK economy.
The European Union could soon find itself in Trump's crosshairs, facing potential tariffs that threaten to exacerbate economic tensions. Analysts suggest that Trump's leverage over China has weakened, limiting his effectiveness in the ongoing trade dynamics. These developments coincide with the BoE's monetary policy review, which is expected to feature a 25 basis points (bps) cut in the key interest rate, following a series of reductions that saw 50 bps slashed throughout 2024.
UK policymakers will unveil updated economic projections, including an assessment of the economy's potential growth rate, currently estimated at 1.3%. The British Pound (GBP) is likely to remain stable against initial headlines but may react to these economic forecasts and the Monetary Policy Committee's (MPC) voting outcomes.
Valeria Bednarik, Chief Analyst at FXStreet, highlighted the current dynamics affecting the GBP/USD pair.
“The GBP/USD pair has an immediate resistance level at the 1.2600 threshold, with gains beyond the area exposing 1.266, the December 19 daily high. Beyond the latter, the rally could continue towards the 1.2700-1.2720 area en route to the 1.2800 figure. The 1.2470 price zone provides support ahead of the 1.2400 figure. A break below the latter could see the pair resuming its bearish trend and retesting the aforementioned weekly low at 1.2248.” – Valeria Bednarik, Chief Analyst at FXStreet
UK Gilts yields have reached multi-year highs since the year's onset, raising concerns over government spending and taxation policies. The BoE's anticipated rate cut is seen as a response to these economic pressures, aiming to stimulate growth amid stagnant GDP figures. The UK Gross Domestic Product registered no growth in Q3 2024, a revision from an earlier estimate of a 0.1% increase.
The BoE surprised market participants in December with a hawkish hold when six out of nine MPC members voted to maintain rates, while three advocated for a cut. This decision comes as services inflation recorded a year-on-year drop to 4.4%, falling short of BoE projections, and annual headline inflation eased to 2.5% in December from November’s 2.6%, as reported by the Office for National Statistics (ONS).
Valeria Bednarik further commented on the broader economic implications:
“Central Bank’s decisions and macroeconomic data in general is being overshadowed by US President Trump's decision to unleash a trade war. The UK is not out of Trump’s radar, but it is definitely not among his top rivals. Still, the risk of the UK economic slowdown accelerating amid fresh US tariffs pends on policymakers ahead of the announcement. As for GBP/USD, the pair may resume its slump with a dovish tilt, albeit the reaction could be limited as investors anticipate it. If policymakers sound hawkish, the GBP/USD will likely gain extra upward traction.” – Valeria Bednarik, Chief Analyst at FXStreet
The BoE's decision will be closely scrutinized as it concludes its first meeting of 2025. Market analysts expect a reduction in the benchmark rate to 4.50%, aligning with predictions following economic stagnation and subdued inflation figures.
The UK remains vigilant under Trump's global trade strategies but is not considered a prime adversary in his trade agenda. Nonetheless, potential tariffs and their implications for the UK economy warrant attention as policymakers navigate these complex international waters.