Pound Upside Against Euro Intact on Tariff Advantage, Bank of England Ahead
- Written by: Gary Howes
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Picture by Simon Dawson / No 10 Downing Street.
Tariff Angst Helps Pound to Euro Rate Cement Gains Above 1.20, Advance Cools Ahead of Bank of England Decision.
Pound Sterling has retreated from Tuesday's highs against the Euro but remains on course to comfortably record another weekly gain, provided Thursday's Bank of England policy meeting goes to plan.
The Pound to Euro exchange rate rallied to a high of 1.2060 on Monday amidst heightened fears Donald Trump would push ahead with tariffs on Mexico, China and Canada, with plans to announce tariffs on the European Union.
"The pound emerged as a safe haven among pro-cyclical currencies and seems to be retaining some solid footing after an American trade war was averted. The reason is simple: the UK does not have much to lose from US tariffs," says Francesco Pesole, an analyst at ING Bank.
Mexico and Canada ultimately won a reprieve, which helped the Euro recover against the British Pound as it suggests Trump is open to negotiation, which would eliminate worst-case outcomes for the European Union's economy.
That being said, the Euro's recovery against the Pound and Dollar is limited as uncertainty will prevail until Trump shows his hand.
"With the Eurozone economy basically flatlining currently, there is understandable nervousness about what an additional headwind from a trade war with the US would mean," says HSBC's senior FX Strategist Daragh Maher. "We believe it poses downside risks to the currency."
GBP/EUR investment bank consensus forecast for 2025. See the median, mean, highest and lowest point targets, giving a highly accurate forecasting resource. Request it Now.
GBP a Tariff Hedge
The British Pound currently trades as a hedge against U.S. tariffs, as UK exports to the U.S. are less than 2% of GDP and those to China less than 1%.
The UK is one of the only countries in the world to have a neutral trade relationship with the U.S. in goods, i.e. the UK imports a similar value of U.S. goods as the U.S. imports from the UK.
ONS figures for 2023 show that the UK imported £57.9BN of goods from the United States and exported £60.4BN.
Official U.S. data actually shows the U.S. runs a rare trade surplus with the UK. BEA data for November 2024 showed the U.S. recorded a $0.3BN trade surplus with the UK.
"Statistical interpretations mean that both the UK and the U.S. are of the view that they maintain modest trade surpluses with each other," says Jane Foley, Senior FX Strategist at Rabobank.
"While the UK does export a fair number of vehicles to the U.S., clearly the fact that the U.S. authorities view themselves as maintaining a goods trade surplus means that the UK was never going to be in the centre of Trump’s sights when it comes to a trade wars and tariffs," adds Foley.
Perceptions of relative tariff insulation mean the Pound trades marginally higher against the Dollar on the week, and the Pound to Euro exchange rate is up by 0.42%, putting in train a third consecutive week in the green.
"Trump seems in no rush to hit the UK with tariffs, also considering its goods trade balance with the U.S. is arguably negligible. Trump also seemed to be on rather amicable terms with UK Prime Minister Keir Starmer after a recent call," says Pesole.
Above: GBPEUR at daily intervals.
Trump has yet to unveil further tariff details on Europe, but his communications suggest the route of attack is being planned.
"So, the UK is way out of line, and we'll see, the UK, but the European Union is really out of line," Trump told reporters on Sunday. "UK is out of line, but I’m sure that one, I think that one can be worked out. But the European Union is, it's an atrocity."
"Risks for EUR may still be skewed to the downside as Trump has yet to unveil further tariff details on Europe," says Christopher Wong, FX and Rates Strategist at OCBC. "Uncertainty looms for European Union, as Trump did earlier warn about tariffs, and he did say he wanted tariffs 'much bigger' than 2.5%. In the interim, EUR may be the weakest link."
Starmer's EU Agenda Can Bolster GBP
Despite the headwinds posed to the European Union's economic outlook by Trump's tariffs, ING thinks the Pound could still benefit from a closer EU-UK relationship, which is looking increasingly likely.
"Another factor contributing to sterling strength was Starmer’s trip to Brussels. That was officially aimed at strengthening an EU-UK defence path, but on which markets may be double reading an intent by Starmer to gradually reconnect with the EU politically. That is inarguably positive for sterling, which remains highly sensitive to any development that can improve a worsening growth outlook," says Pesole.
Starmer said his trip would be a 'reset' in EU-UK relations as he became the first Prime Minister since Brexit to join a meeting of EU leaders and talks were focused on defence and security cooperation.
Despite Starmer's trip, there were limited takeaways to excite the markets, highlighting how difficult it will be to secure any concessions from Europe without making potentially politically risky concessions.
GBP/EUR investment bank consensus forecast for 2025. See the median, mean, highest and lowest point targets, giving a highly accurate forecasting resource. Request it Now.
Bank of England to Limit GBP/EUR's Advance Over Next 24 Hours
Downside risks for the Pound this week come in the form of the Bank of England's Thursday rate decision.
Here, the Bank, may deliver a "dovish rate cut," says Pesole. "Still, EUR/GBP may not return to the 0.8450 January peak soon."
The sting has been taken out of the tail of a 'dovish' Bank of England policy decision, as the Pound has already made a notable adjustment lower in 2025.
This is because markets see the UK experiencing lower growth than was the case last year, and more interest rate cuts from the Bank are already anticipated.
If the Bank cuts but keeps its guidance relatively similar to that of December, then there is limited downside for the Pound, as a lot of hot air has already been released by the January selloff.
"GBP has re-priced this year to take account of a poorer UK growth and budget outlook than was expected at the time of last year's July election," says Jane Foley,