Trump speaks on January 21. All signs point to a falling likelihood of a universal tariff, which was the most hawkish scenario for USD. Image: Pound Sterling Live. Still source: Reuters.
Pound Sterling's relief rally against the Dollar comes amidst signs Donald Trump is taking a measured approach to tariffs. But analysts caution this is a reprieve, not a trend change.
The Pound to Dollar exchange rate has formed a base above 1.2160 and a short-term relief rally could carry it to 1.24 in the coming days.
Dollar weakness is the current driving force in global FX, reflecting investor relief that Donald Trump is set to pursue a more measured tariff agenda.
To be sure, tariffs are coming, but the fire and brimstone promised in the campaign have given way to mixed rhetoric from Trump, who has tasked federal agencies to look into the matter more closely.
"USD is at its post-inauguration lows in line with our view expectations for initial radical policy change was too high. Contrary to market expectations, President Trump asked officials to merely review the trade policies of other economies rather than apply worldwide tariffs," says Joseph Capurso, Head of International and Sustainable Economics at the Commonwealth Bank of Australia.
The most pro-Dollar outcome would have involved Trump signalling a blanket import tariff, which would have raised U.S. inflation and interest rates. It would have also penalised currencies belonging to major exporters.
Trump has instead tasked federal agencies to study existing trade imbalances and tariff scenarios, asking them to report back on April 01. At this point, key names like Jamieson Greer will be installed in government and will be able to spearhead the new agenda.
"We expect changes to tariffs would be announced on or soon after 1 April to take effect one or two months later. The bottom line is changes to tariff policy is coming. But the timeline means there is plenty of time for business (US and foreign) and foreign governments to lobby for exemptions," says Capurso.
Foreign exchange markets built a risk premium into currency valuations following Trump's November victory, which contributed to fresh lows in Pound-Dollar and other USD exchange rates.
As it becomes clearer that there is a route to less severe trade outcomes, some of this premium is priced out, contributing to a rise in Pound-Dollar.
But, tariffs are still coming, and analysts say it is too soon to call the end of the Dollar advance.
"With the more straightforward buy-the-rumor phase of the ‘tariff trade’ now behind us, there is some understandable handwringing around the longevity of the dollar trend," says Patrick R Locke, an analyst at JP Morgan.
But, "tariffs delayed are not tariffs cancelled by any stretch." This underpins JP Morgan's view bouts of USD weakness will be a "fade".
Above: There are signs of a temporary base in GBPUSD.
Deutsche Bank analysis finds markets might still be underestimating the looming Trump shake-up.
"Our conclusions are not optimistic: despite recent moves, the market is not pricing sustained macro divergence between the US and the rest of the world, nor a big trade war," says George Saravelos, lead FX analyst at Deutsche Bank.
Saravelos says his analysis doesn't try to predict what Trump will do; rather, he looks at how much "policy premium" is being reflected in currencies most exposed to a potential regime break. His findings show the market is not yet fully priced for Trump.
"We enter 2025 maintaining our dollar bullish view," says Saravelos. "The greenback has potential to exceed its
Volcker all-time highs."