The British pound is one of the most heavily traded currencies on the global forex market, which means that millions of traders and consumers pay great attention to the performance of the GBP, particularly in relation to the United States dollar and the Euro.
The election of Donald Trump and the ensuing tariff wars have opened the floodgates for speculation, as the effects of the trade wars looked to upend the prior established supply chains and trade balances.
For this reason, many traders have been speculating on the future prospects of the GBP amid the trade wars, as well as the possibility of the United Kingdom to strike a trade deal with the new U.S. administration.
The issue of tariffs has been a hotly debated topic since the election of Donald Trump, with a harsher rhetoric being directed towards European countries and a blanket 10% tariff rate being upheld on all imports coming from them, including from the United Kingdom.
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Inflation And GBP Interest Rates
High inflation in the United Kingdom, coupled with rising energy prices due to the ongoing Russian invasion of Ukraine, has prompted the Bank of England to raise interest rates to 4.5%, which is unlikely to fall in the near future, as prices remain high.
Higher rates have allowed the GBP/USD pair to climb from 1.27 to 1.33 between April 7-22 alone. This rise is even more pronounced when looking at the January 2025 exchange rate between the pair, which stood at 1.22.
Due to analyst expectations regarding a U.S. recession due to trading difficulties caused by tariffs and high interest rates, GBP is unlikely to suffer in the short term, despite the economic woes of its own.
However, it is also worth noting that the trade wars have forced UK analysts to cut GDP growth figures from 1.6% to 1.1%.
The Effects Of Trump Tariffs On The UK
The inflation rate in the UK is likely to remain within the 3.0-3.1% range, which means that interest rates are unlikely to fall greatly in the short term, which is a case for a strong pound.
On the other hand, the U.S. tariffs can hit specific industries globally, particularly the steel and automotive industries, where tariffs are as high as 25%.
While the UK auto industry is considerably smaller than that of Germany, France and Italy, tariffs on manufacturing goods are likely to have ripple effects on the overall output of the economy in the coming years.
It is important to note that the UK has chosen not to place reciprocal tariffs on the United States, which means that it is unlikely for inflation to rise in the country due to tariffs.
Going forward, the possibility of renegotiating tariffs and a new trade deal seem less likely in the short term, as protectionist sentiment has only risen in the United States since the start of Donald Trump’s second term as the President of the United States.
What To Expect From GBP In The Coming Years
While tariffs have been at the forefront of media discussion over the past few months, it is also worth noting that the Trump administration has maintained strategic ambiguity regarding the prospects of renegotiating tariffs and trade deals, which is highly likely to include the UK as well.
On the other hand, the broader economic prospects of the country do not seem to inspire confidence, with higher interest rates and energy prices dominating local economic discourse.
Trump’s wish to devalue the USD to strengthen export potential could be a lifeline for GBP investors, as the internal structural issues of the British economy could be balanced by a declining dollar in the long run.
However, this is unlikely to happen in the short term, which is why it is important to pay attention to macroeconomic factors, such as interest rates and investor confidence.
The millionaire exodus from the United Kingdom is likely to exert downward pressure on tax collection in the UK, which can force the government to bump borrowing, or cut spending, which can adversely affect the overall economic output of the country – weakening the British pound in the process.
