Official White House Photo by Molly Riley
The Dollar continues to benefit from growing hopes of further U.S. trade deals; however, its strength should be limited.
There was no lasting boost to the British Pound from news of a UK-U.S. trade deal, announced on Thursday; instead, it is the Dollar that benefits the most.
"It’s the thaw in the tariff war and rally in stocks and tighter credit spreads that is tempting investors to reverse FX tactics and trim short dollar positions. The greenback gained this week vs all G10 and most EM currencies," says Kenneth Broux, a strategist at Société Générale.
The U.S.-UK trade accord is not a traditional and legally binding 'deal'; instead, it is a framework that UK Prime Minister Keir Starmer says is a work in progress and further details will need to be ironed out in the future.
In short, work on a fully fledged trade deal will continue, even if the U.S. is likely to lose interest now that it has extracted what it wants. While the UK lowered its overall import threshold (down to 1.8% from 5.1%), the U.S. boasts an increased threshold of 10%, up from 3.4%.
There were some wins for the UK: car manufacturers received a carve-out from the universal vehicle import tariff, which was reduced to 10%. But the scale of the economic benefits to both countries from the deal is relatively small, and this is why there was no discernible UK financial market impact related to the details.
The Dollar, nevertheless, stands as the main beneficiary because the U.S.-UK pact signals the U.S. is in the mood to negotiate and stands ready to lower tariffs.
"For a U.S. Dollar that was battered by the "sell America" trade, this is a good thing," says Matt Lewis at TopMoneyCompare.co.uk.
"The main beneficiary in the FX space has been the U.S. dollar, with GBP/USD erasing its earlier gains to trade closer to $1.32," says George Vessey, Lead FX & Macro Strategist at Convera.
The Pound to Dollar exchange rate (GBP/USD) has eased to its lowest level in three weeks following clear signs of improvement in global trade relations now that the U.S. is in the mood to strike a deal.
The pair trades at 1.3230 at the time of writing on Friday, putting it on the cusp of falling through a horizontal support line at 1.3235, which if broken, would signal the potential for a move down to 1.31.
1.31 is the location of another graphical line of potential support that corresponds with a former resistance zone that emerged in early April. It is also the location of the rising 50-day exponential moving average.
Although the Pound is coming under pressure, we suspect weakness will remain shallow and that a test of 1.31 would still represent a pullback in a broader uptrend that is shaping up.
This is because the Dollar is entering a longer-term downtrend as U.S. exceptionalism ends, global investors look to rebalance their portfolios away from heavily favouring the U.S. and investors build hedges on their U.S. exposure (this requires selling USD).
"We remain bearish on the DXY and think USD declines should be most concentrated versus EUR and JPY, followed by GBP and CHF. We think investors will continue to add FX hedges to their existing US investments given the elevated level of policy uncertainty and market volatility," says a strategy note from Morgan Stanley released this week.
Analysts also point out that the UK-U.S. trade deal confirms President Donald Trump is not relenting in his desire to raise tariffs. Indeed, the 10% tariff on UK imports remains, even if some concessions have been made elsewhere.
This tells us that other nations with a more significant trade in goods with the U.S. won't necessarily see the reductions they hope for. This is ultimately a negative for U.S. consumers who will need to pay more for imports.
"This trade deal is not a positive indicator for broader tariff de-escalation. With the US running a $12bn goods trade surplus with Britain in 2024, the UK’s inability to negotiate a lower rate suggests nations with US trade deficits may face even tougher terms," explains Vessey.