The Pound weakened on Friday as cautious investors sought refuge in the Dollar amid increasing concerns about the US economic outlook, with President Donald Trump's tariffs set to take effect.
However, despite this dip, Sterling remained on track for its first monthly gain since September. This rise was driven more by expectations that UK interest rates would decline at a slower pace than in other economies rather than by confidence in the UK’s economic performance.
The Pound slipped 0.2% on the day to $1.259 but remained up 1.6% for February, marking its strongest monthly gain since September’s 1.9% rise, Reuters reports.
Market expectations suggest that both the Federal Reserve and the Bank of England will implement around two rate cuts this year, with an increasing likelihood of a third. According to interest-rate futures, US rates are projected to end the year at 3.73%, slightly lower than the anticipated 3.8% in the UK.
The contrast is even greater with the European Central Bank, which is anticipated to lower eurozone rates at least three more times this year, bringing them below 2%.
The Euro has also faced broader pressure following President Trump's threat of imposing a 25% tariff on European Union exports, including cars and other goods.
This week, the single currency dropped to its lowest level against the Pound since mid-December, losing more than 2.5% since Trump took office. On Friday, it remained relatively unchanged, around 82.56 pence.
British Prime Minister Keir Starmer visited President Trump in Washington on Thursday for the first time, where they discussed various topics including peace in Ukraine, European defence spending, and tariffs.
The UK faces less exposure to tariff risks compared to the EU, as it enjoys a trade surplus with the US and most of its exports are services.
During their meeting, both leaders talked about a potential trade deal, with Trump suggesting that Britain could be exempt from the proposed tariffs.
“Sterling could continue to outperform in the short run, particularly against the Euro and riskier currencies, although a lot is already priced in,” said BBVA strategists.
The next key event for currencies is the upcoming release of the US personal consumption expenditures (PCE) index. This index reflects broad consumer price pressures and could play a crucial role in shaping expectations regarding the direction of US interest rates in the first half of the year.