LIVE MARKETS-Sterling swerves tariff wars

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STERLING SWERVES TARIFF WARS

Sterling was an unexpected winner of safe haven flows on Monday as the British currency side stepped the trade war headlines that sent other assets including stocks and the currencies of Mexico, Canada, and the eurozone tumbling.

“The pound emerged as a safe haven among pro-cyclical currencies yesterday, and seems to be retaining some solid footing after an American trade war was averted,” ING FX analyst Francesco Pesole said in a report on Tuesday.

Sterling’s benefit is simple, Pesole said. “The UK does not have much to lose from US tariffs. UK exports to the US are less than 2% of GDP and those to China less than 1%.” In addition, “Trump seems in no rush to hit the UK with tariffs, also considering its goods trade balance with the US is arguably negligible."

The British currency is also benefiting from efforts by Prime Minister Keir Starmer to strengthen EU-UK defense.

That was the official reasoning for a trip to Brussels, but Pesole notes that “markets may be double reading an intent by Starmer to gradually reconnect with the EU politically. That is inarguably positive for sterling, which remains highly sensitive to any development that can improve a worsening growth outlook.”

Indeed, it's not all good news for the pound. Higher borrowing costs are eating into the fiscal headroom for the UK Chancellor. On Thursday, the Bank of England is also expected to deliver “a dovish rate cut.”

And that means that sterling may not advance back to the $0.8450 level reached against the euro in January anytime soon, Pesole said. EURGBP=

(Karen Brettell)

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