Image © The White House
Pound Sterling recovered prior losses from the US Dollar and Euro overnight on Thursday after the White House announced a 90-day delay to the implementation of its new global import tariff, which could see GBP/EUR back around 1.1720 in the session ahead as GBP/USD recovers the 1.29 handle.
GBP/USD rose close to 100 points to 1.2850 and above overnight, as GBP/EUR rallied some 150 points to reclaim the 1.17 handle after President Donald Trump said in a social media post that his global reciprocal tariff would be reduced to 10% and that its implementation would also delayed for 90 days.
A possible relief rally in global equity markets, and prospect for stabilization in the Sterling bond market, is fuel for the recovery of Pound Sterling on Thursday, which could also benefit from the downward bias of the trade-weighted Renminbi as this is an ongoing headwind for the positively-correlated US Dollar.
“China has now switched to fight mode,” says Carol Kong, a strategist at Commonwealth Bank of Australia. “The Chinese government’s aggressive posture suggests tit‑for‑tat retaliation with the US is likely to continue in the near term, increasing downside risks to Chinese economic growth and inflation.”
Above: Pound to Dollar rate shown at 15-minute intervals, with GBP/EUR. Click for closer inspection.
The tariff on imports from China was raised to 125% overnight after the Commerce Ministry in Beijing lifted its own levy to 118% previously, which is a further headwind for the world’s second largest economy and a source of pressure for its currency, which has fallen in a controlled depreciation over recent days.
This is a headwind for the US Dollar too because Beijing’s basket-based approach to its managed-floating exchange rate creates a positive correlation with, if not quasi peg to, the greenback. However, the central parity fixings and related trading limits mean its depreciation is playing out only slowly.
“They prefer stability over any sort of devaluation, we all know that. But, if push comes to shove and factories are closing and exports to the US are plummeting, while the EU also puts protective walls up, then the currency may have to be used,” says Brad Bechtel, head of FX at Jefferies.
“The other alternative is that they come to the negotiating table with Trump and Trump gives them reduced tariffs, far lower than 104%, maybe back to 10% or so and the Chinese agree to let their currency strengthen. We all know it is undervalued, by quite a bit, and this has been a bee in Trump's bonnet,” he adds.
Above: GBP/CNY shown in green, alongside USD/CNY and EUR/CNY. Click for closer inspection.