Pound Sterling Strength Highlights UK’s Low Tariff Vulnerability
The British Pound has been gaining strength against other currencies after U.S. President Donald Trump announced new tariffs on goods from Mexico, Canada, and China. He revealed that there would be a 25% tariff on products from Mexico and Canada, along with an unexpected 10% tariff on China. There had been some hope that the U.S. might agree to a milder approach regarding tariffs, but Trump dashed those hopes by confirming that the tariffs would take effect as planned on March 4.
During a press conference with UK Prime Minister Keir Starmer, Trump stated that he wasn’t seeing enough progress in controlling the flow of drugs, which is his main concern related to the tariffs on Canada and Mexico. Following this announcement, the U.S. Dollar benefited, causing the exchange rate between the Pound and the Dollar to drop to 1.2609. The Canadian Dollar and Mexican Peso were hit hard by these changes, and the Euro also experienced a decline, as markets recognized that the European Union might face similar challenges from Trump’s policies.
According to Mathias Van der Jeugt from KBC Markets, currencies of those countries that could be affected by tariffs suffered the most significant setbacks. In contrast, the Pound’s value against the Euro increased to 1.2131, reaching its highest point since December 19. The Pound also performed strongly against other stable currencies like the Swiss Franc and Japanese Yen. This indicates that investors are viewing the UK as relatively insulated from these tariff threats.
The foreign exchange (FX) market is treating the British Pound as a sort of safe haven when it comes to tariffs. This is largely due to the UK having a relatively balanced trade relationship with the U.S. In other words, the UK imports about the same amount of goods from the U.S. as it exports to the U.S. Data from the Office for National Statistics (ONS) for 2023 shows that the UK imported £57.9 billion worth of goods from the U.S. while exporting £60.4 billion. Interestingly, official U.S. statistics indicate that the U.S. has a rare trade surplus with the UK.
March 4 is marked on the calendar as the date when further decisions regarding the tariffs on Mexico and Canada will be announced after a month of negotiations. Trump has stated that these neighbors have not done enough to control the flow of Fentanyl, leading to the implementation of the new 25% tariffs.
Despite the noticeable reactions in the foreign exchange markets, many believe that these developments may not be permanent. Historically, Trump has been known as a negotiator and has even rescinded tariffs shortly after imposing them. For instance, during his first term, he quickly overturned tariffs on Mexico within a matter of days.
Philip Shaw, an economist at Investec, points out that until any tariff announcement is officially documented in an executive order, there remains a chance for changes. He emphasizes that even after a signed order, adjustments can still occur. Nonetheless, the current market atmosphere is one of caution, as there is a sense that Trump might follow through on his threats. According to Karl Schamotta, Chief Market Strategist at Corpay, the political situation suggests that Trump will likely need to act on these tariff threats eventually.
