Pound Resilient Amid Tariff Tensions and Central Bank Shifts
GBP
The Pound held firm last week, supported by comments from Bank of England (BoE) Deputy Governor Dave Ramsden, who emphasised the need for a gradual approach to rate cuts. Investors continue to expect the BoE’s easing cycle to be more measured than other major central banks, with markets pricing in two rate cuts this year. In contrast, the European Central Bank (ECB) is expected to cut rates three times, while the Federal Reserve is anticipated to lower rates by 60 basis points.
Stronger-than-expected wage growth has reinforced expectations of a slower pace of BoE policy easing. Average earnings (excluding bonuses) rose by 5.9% in the three months to December, the highest level since April 2024. While Ramsden acknowledged this strength, he maintained that the broader disinflationary trend remains intact.
Meanwhile, political developments provided a further boost to Sterling. The Pound reached its highest level against the Euro since December, following comments from U.S. President Donald Trump suggesting a potential free trade agreement with the UK. Trump also ruled out tariffs on UK goods and stated a deal could be reached quickly. However, his meeting with UK Prime Minister Keir Starmer ended without a formal agreement.
GBP/EUR is currently sitting at 1.2115, while GBP/USD is at 1.2612. The UK data calendar is quiet this week, and the pound will primarily be driven by external input. The major domestic event is the Treasury Committee questioning of Bank of England Governor Andrew Bailey and other MPC members on Wednesday. This session may provide insight into future monetary policy and inflation expectations, but with no high-impact data releases, the pound is likely to take direction from broader market trends.
EUR
The Euro faced renewed pressure as trade tensions escalated. Trump signalled that a 25% tariff on EU imports is imminent, stating that the European Union was “formed to screw the United States.” His administration is expected to confirm the decision soon, adding to the challenges facing the bloc.
The prospect of EU tariffs intensified after Trump announced a 10% duty on Chinese imports and confirmed that levies on Canada and Mexico would take effect next week. His aggressive trade stance could put further strain on the Euro, particularly as the ECB prepares for a more aggressive rate-cutting cycle.
The Eurozone has a busy week ahead. This morning saw the release of the Core Harmonized Index of Consumer Prices (HICP), which tracks inflation changes across the European Monetary Union. On Thursday, retail sales data will be published, providing insight into consumer spending trends. The most significant event of the week is the ECB Monetary Policy Statement and interest rate decision. According to a Reuters poll, the ECB is expected to cut rates by 50 basis points on March 6. After that, rates are expected to remain steady until at least 2026, though some forecasts suggest further cuts in 2025, bringing the deposit rate down to 1.75–2% by the end of the year. The ECB’s statement will provide further clarity on its inflation outlook and future policy direction.
USD
Investors remained cautious as Trump ramped up his trade war rhetoric, confirming that 25% tariffs on Canadian and Mexican imports will come into effect on 4 March. He also blamed China for the influx of fentanyl into the U.S. and imposed an additional 10% tariff on Chinese goods, with the possibility of further reciprocal tariffs in April.
Domestically, market focus is shifting to U.S. inflation data, with the core Personal Consumption Expenditures (PCE) Price Index due for release. Analysts expect annual core PCE inflation to have slowed to 2.6% in January, down from 2.8% in December. However, monthly inflation is projected to have risen by 0.3%, up from the previous 0.2%. As the Federal Reserve’s preferred inflation measure, these figures will be key in shaping expectations for future monetary policy decisions.
Today, the US releases ISM Manufacturing PMI, which is expected to show a slight decline for February. Investors will also watch the ISM Prices Index and the Employment Index for further economic signals. On Wednesday, the ADP Employment Change report will provide insight into private-sector job growth, alongside the ISM Services PMI, which measures business activity in the services sector. The highlight of the week will be Friday’s Non-Farm Payrolls report, considered the most important economic indicator for FX markets. A stronger-than-expected print tends to be USD bullish, with the current consensus at 153k versus the previous 143k.
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