Sterling recovered some ground against the dollar on Tuesday after weakening in the previous session, when the United States and China said they had temporarily cut reciprocal tariffs following negotiations over the weekend.
The U.S. and China have agreed to temporarily slash tariffs in a deal that surpassed expectations, and the de-escalation in the trade war between the world’s two biggest economies sparked risk appetite globally.
Sterling rose 0.26% to $1.32115, after falling 1% against the dollar to a four-week low at $1.318 on Monday.
It was steady against the euro and the yen, trading flat at 195.48 yen, while the euro slid 0.14% to 84.06 pence, holding its low of more than five weeks.
“The global environment for UK assets and therefore the currency is actually relatively favorable,” said Samy Chaar, chief economist at Lombard Odier, pointing to a more stable macro environment, improving domestic inflation, as well as Britain’s improving relations with the rest of the world, as evidenced by their trade deals with the U.S. and India.
Sterling claws higher after US/UK trade deal
Bank of England Chief Economist Huw Pill however said that he was worried inflation in Britain could prove stronger than policymakers expect and interest rates might need to stay higher than investors currently think.
Last week, Pill voted against the BoE’s quarter-point interest rate cut.
The market is pricing in a cut in interest rates of up to 48.6 basis points in total by the end of the year, with no change in policy at the next BoE meeting in June.
Earlier in the day, the pound had no noticeable reaction to UK wages data.
“Far more interesting for the Bank of England will be next week’s April CPI services release,” Chris Turner, head of forex strategy at ING, wrote in a note to investors.
Turner also pointed to the UK-EU summit on May 19, two days before the inflation data release, saying he expected sterling to stay bid ahead of that, “potentially even seeing EUR/GBP break below 84.0.”
Around mid-April, the euro shot up to its highest level against the sterling since 2023 at 87.38 pence, before retreating to 84.06 on Tuesday, its lowest since April 3.
“I don’t think we’ll be able to hold levels under 84.0 for euro/sterling for very long,” said Kit Juckes, chief FX strategist at Societe Generale.
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