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4 Feb 2025
GBP/USD remains above 1.2400, eyes on tariff implementation on China
- GBP/USD could lose ground as China is set to be hit with a 10% across-the-board tariff on Tuesday.
- Trump said on Monday afternoon that talks with China would take place probably over the next 24 hours.
- Traders expect the BoE to deliver a 25 basis point rate cut on Thursday amid signs of slowing inflation in the UK.
GBP/USD continues to gain ground for the second successive session, trading around 1.2430 during the Asian hours on Tuesday. The pair improved amid improved risk-on sentiment after US President Donald Trump announced late Monday that he would pause tariffs on Mexico and Canada.
However, market volatility remains a concern, with investors closely monitoring developments in ongoing tariff negotiations. President Trump stated that he would suspend steep tariffs on Mexico and Canada after their leaders agreed to deploy 10,000 soldiers to the US border to combat drug trafficking. The tariffs on Mexico and Canada have been postponed for at least 30 days.
The decision to postpone tariffs comes just two days after Trump imposed 25% tariffs on Mexican and Canadian goods and 10% tariffs on imports from China. China is set to be hit with an across-the-board tariff starting at 05:00 GMT on Tuesday. However, Trump said on Monday afternoon that talks with China would take place “probably over the next 24 hours.” He also said, “If we can’t make a deal with China, then the tariffs will be very, very substantial.”
The US Dollar Index (DXY), which measures the US Dollar’s (USD)value against six major currencies, stabilizes around 108.70 at the time of writing after giving up most of its gains in the previous session. However, the upbeat US economic data could provide some support to the Greenback. ISM Manufacturing PMI rose to 50.9 in January from 49.3 in December. This reading came in better than the estimation of 49.8.
The upside of the GBP/USD pair could be restrained as the Pound Sterling (GBP) may face risks due to expectations that the Bank of England (BoE) will restart its policy-easing cycle, likely cutting interest rates by 25 basis points (bps) to 4.5% on Thursday.
Traders anticipate a dovish stance from the Bank of England amid signs of slowing inflation, despite accelerating wage growth in the United Kingdom (UK). The BoE’s Monetary Policy Committee (MPC) is expected to vote 8-1 in favor of a quarter-point rate cut to 4.5%, with one member likely advocating for maintaining current rates for another meeting.
Tariffs FAQs
Tariffs are customs duties levied on certain merchandise imports or a category of products. Tariffs are designed to help local producers and manufacturers be more competitive in the market by providing a price advantage over similar goods that can be imported. Tariffs are widely used as tools of protectionism, along with trade barriers and import quotas.
Although tariffs and taxes both generate government revenue to fund public goods and services, they have several distinctions. Tariffs are prepaid at the port of entry, while taxes are paid at the time of purchase. Taxes are imposed on individual taxpayers and businesses, while tariffs are paid by importers.
There are two schools of thought among economists regarding the usage of tariffs. While some argue that tariffs are necessary to protect domestic industries and address trade imbalances, others see them as a harmful tool that could potentially drive prices higher over the long term and lead to a damaging trade war by encouraging tit-for-tat tariffs.
During the run-up to the presidential election in November 2024, Donald Trump made it clear that he intends to use tariffs to support the US economy and American producers. In 2024, Mexico, China and Canada accounted for 42% of total US imports. In this period, Mexico stood out as the top exporter with $466.6 billion, according to the US Census Bureau. Hence, Trump wants to focus on these three nations when imposing tariffs. He also plans to use the revenue generated through tariffs to lower personal income taxes.