Though sterling has kept the lion's share of gains that delivered a 2-week high of 1.2345 to start the week, lingering UK fiscal concerns and uncertainty about the trajectory of the Trump administration's U.S. tariff policy could leave it vulnerable. For the moment, Trump tariff relief sentiment and a nascent bid for UK gilts were supporting sterling bulls' bid to avoid early 2025 lows by 1.21. But the fiscal worries that fueled the January jolt lower in GBP/USD and called into question Prime Minister Keir Starmer's ability to manage the UK current account deficit and budget remain after public debt reached 100% of GDP in August 2024. Additionally, persistently above target inflation, relatively high UK rates and sluggish GDP growth continue to weigh on the economic outlook. All this leaves the timing of and degree of Trump tariffs as the primary driver of near-term sterling volatility, along with rate expectations. Markets project a slightly more dovish UK rate outlook than U.S. in 2025, including a BoE rate cut in February, which may put the 2025 low of 1.21 in sharper focus.
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(Paul Spirgel is a Reuters market analyst. The views expressed are his own)
((paul.spirgel@thomsonreuters.com))
