BoE will not 'overreact' to tariffs as GBP to rebound

Matthew Ryan, CFA Ebury

We’ve been very surprised by the poor showing in the pound since 2nd April.

While sterling has far from been among the worst performing majors (that mantle lies solely with the Australian dollar), the UK currency has tanked against the euro in the last few sessions (GBP/USD slumped below the 1.17 level yesterday from 1.20 on Wednesday).

The UK is pretty isolated from the tariffs given its low exposure to global demand (particularly the US and China) and the fact that the direct tariffs themselves are low at just 10%. Yet, investors appear to be punishing GBP given its high-risk status and elevated interest rates, which allow room for aggressive easing under a scenario where the Bank of England presses the panic button on the growth outlook.

We are confident that this underperformance won’t last for too much longer.

We don’t expect the MPC to overreact to the tariffs, and the economic hit will probably transpire to be relatively minimal (troubles at home probably carry greater weight for Britain’s economy in our view). The latest GDP figures for February will be released on Friday, with modest expansion eyed.

Author

Matthew Ryan, CFA

Ebury

Matthew is Global Head of Market Strategy at FX specialist Ebury, where he has been part of the strategy team since 2014. He provides fundamental FX analysis for a wide range of G10 and emerging market currencies.

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