The Pound Sterling dropped sharply below 1.3200 against the US Dollar after a 115% agreement between the US and China to reduce tariffs for 90 days. This development could allow the Federal Reserve to cut interest rates. This week, attention turns to UK employment and US CPI data due on Tuesday. The GBP/USD pair saw a recovery to near 1.3140 yet remains down by 0.8% at 1.3200. The agreement on tariff reductions from Wednesday strengthened the US Dollar, impacting the Pound’s performance. The US Dollar Index rose to near 101.80, its highest since April 10. US Treasury Secretary Scott Bessent stated the tariff reduction agreement would see levies lowered to 10% and 30% for the US and China, respectively. Despite unresolved issues like fentanyl, the reduction appears poised to alter asset class performances globally.

Monetary Policy Shifts

The Bank of England maintained a gradual monetary approach, lowering interest rates by 25 basis points to 4.25%. Deputy Governor Clare Lombardell indicated more cuts might follow due to “gradual disinflation progress.” Meanwhile, UK job data and US CPI figures are poised to influence GBP/USD movements. The Pound dipped below 1.3200 amid the bearish Head and Shoulders pattern on a four-hour chart, touching the 200-period EMA near 1.3190. Tariffs, distinct from taxes, impact international trade, using customs duties, while taxes apply to purchases. Tariffs remain controversial, potentially protecting industries or escalating trade tensions. Donald Trump’s tariff strategy targets major import contributors, generating revenue to reduce taxes. With the Pound Sterling having slipped below the 1.3200 level, the latest wave of attention focuses not only on geopolitical narratives but also on shifting sentiment in interest rate expectations. The backdrop of the US and China reaching what Bessent heralded as a 115% tariff reduction pact seems to have ignited fresh momentum in USD strength, pulling Sterling recently below technical support areas and testing market depth near the four-hour 200-period EMA. While this agreement halts further tariff escalation for now, the response in global FX markets has been swift, with investors quickly pricing in lower risk premiums on Dollar-denominated assets. That reaction has ripples. For one, the Dollar Index rallying to 101.80—levels not witnessed since early April—underpins the shifting yield narrative in the US. Should markets interpret the tariff reduction as a deflationary mechanism—by lessening import costs—some may see it supporting looser financial conditions. As such, there is growing chatter about whether the US Federal Reserve will lean further toward easing. The reduced push of imported inflation can play directly into their dual mandate, especially if Tuesday’s CPI reading prints softer than expected.

Rate Cut Speculation

Through our lens, what matters over these coming weeks is layered. On the one hand, risk is emerging that lower US rates could anchor long-end treasury yields, which typically narrows yield differentials and supports currencies like Sterling. However, in this instance, the UK’s softening job market, and the latest guidance from Lombardell, suggest we might see dovish policy synchronisation across both sides of the Atlantic. Though a 25 basis point cut from the BoE was well telegraphed, it’s the tone that offers something meatier. “Gradual disinflation progress” feels coded—used to signal that they are not done. There’s little incentive for policymakers in Threadneedle Street to front-load easing right now, especially with services inflation still causing friction, but they exemplify a readiness to keep guiding rates down gently. That may cap Sterling gains, particularly if labour market data confirms cooling wages. One cannot ignore the formation appearing on shorter-term GBP/USD charts either. The Head and Shoulders structure, with neckline pressure at key EMA levels, is proving sticky. This pattern typically signals distribution—professionals lightening positions rather than hoarding exposure. More often than not, it precedes follow-through selling. That said, this will only validate technically if GBP/USD convincingly breaks below 1.3180 on strong volume. We’re also seeing derivatives markets reflect this caution. Implied volatilities around Tuesday’s CPI event are firming, especially in short-dated GBP/USD options. Risk reversals lean bearish—indicative of hedging or positioning skewed towards Sterling weakness. It reflects short-term uncertainty, especially with overlapping narratives of global tariffs, disinflation and central bank policy recalibration. The context of tariffs, too, remains delicate. While they’re not taxes in the domestic sense, their use as policy levers—especially by figures like Trump—has become a tool of trade diplomacy and revenue strategy. They can stimulate certain sectors but suppress broader trade volumes. With the current agreement pencilling in softer levies, markets are betting on less friction, lower costs, and perhaps a more straightforward monetary policy path. اکنون تجارت را شروع کنید – برای ایجاد حساب VT Markets زنده خود اینجا را کلیک کنید