Pound Sterling Weakens Against US Dollar as Trump’s Tax Agenda Advances.
The British Pound (GBP) has faced renewed selling pressure against the US Dollar (USD), dropping to around 1.2640 in European trading hours on Wednesday. This decline primarily driven by a resurgence in the US Dollar, fueled by recovering US Treasury yields and the advancement of former President Donald Trump’s ambitious $4.5 trillion tax cut plan.
US Dollar Rebounds on Stronger Treasury Yields
The US Dollar, which earlier declined to an 11-week low of 106.10 on the Dollar Index (DXY), rebounded significantly as US Treasury yields gained ground. The 10-year Treasury yield recovered to approximately 4.33% after hitting a two-month low of 4.28% during Asian trading hours.
The resurgence in bond yields sparked by the Republican-controlled House of Representatives advancing Trump’s tax cut proposal, which includes provisions for border security, military spending, energy deregulation, and the deportation of undocumented migrants. These policy measures expected to inject significant liquidity into the US economy, potentially increasing inflationary pressures. As a result, the Federal Reserve (Fed) may be force to maintain interest rates at elevated levels for a prolonged period to counteract inflation.
Impact of Trump’s Tax Plan on the US Economy
Trump’s proposed tax cuts are aimed at stimulating economic growth by reducing the tax burden on businesses and individuals. However, the scale of the plan raises concerns about its long-term fiscal sustainability. If enacted, the tax cuts could lead to a significant budget deficit, potentially increasing government borrowing.
The potential rise in government spending and deficits may lead to higher inflation, which could keep the Fed in a restrictive monetary stance for an extended period. Investors will closely monitor upcoming economic data, particularly inflation indicators such as the Personal Consumption Expenditures (PCE) Price Index, to assess the likelihood of Fed rate adjustments.
Federal Reserve’s Interest Rate Outlook
Market expectations for Federal Reserve rate cuts have fluctuated in response to recent economic data. Weak February flash PMI data indicated a contraction in US service sector activity for the first time in over two years, reinforcing market speculation about potential rate cuts later in 2025.
According to the CME FedWatch tool, the probability of a Fed rate cut in June has increased to 65% from 47% a week ago. However, in the upcoming March and May policy meetings, the Fed is widely expected to keep borrowing costs steady within the 4.25%-4.50% range.
Bank of England’s Dovish Stance Weighs on the Pound
While the US Dollar gains strength from improving bond yields and policy developments, the British Pound remains under pressure due to the Bank of England’s (BoE) increasingly dovish tone.
BoE Monetary Policy Committee (MPC) member Swati Dhingra delivered a speech at Birkbeck on Monday, where she expressed concerns about “weakness in consumption” and indicated that the BoE’s monetary policy remains overly restrictive. Dhingra suggested that more than four rate cuts might be necessary in 2025, significantly above the market’s current pricing of two cuts.
“I know ‘gradual’ has been interpreted in the media as 25 basis points (bps) per quarter, but cutting interest rates at this pace for the remainder of 2025 would still leave monetary policy in an undesirable restrictive position at the end of the year,” Dhingra stated.
Her remarks indicate that the BoE may adopt a more aggressive rate-cutting approach than previously anticipated. This has contributed to the Pound’s depreciation, as lower interest rates typically reduce a currency’s attractiveness to investors.
UK Economic Outlook and Potential Risks
The UK economy faces several challenges, including sluggish growth and external trade uncertainties. The BoE recently lowered its 2025 GDP growth forecast to 0.75%, citing weak consumer spending and potential inflationary pressures from rising energy costs in the third quarter.
Additionally, the UK is vulnerable to trade disruptions stemming from US trade policies. Trump’s tariffs on China, steel, and aluminum imports, along with his threats to impose 25% levies on foreign cars, semiconductors, pharmaceuticals, and lumber, could create significant headwinds for the UK economy.
If Trump follows through on these tariff threats, UK businesses reliant on global supply chains could face higher costs, ultimately impacting economic growth and the Pound’s value.
Key Market Events to Watch for Pound
Looking ahead, investors will focus on key US economic data releases later this week:
US Durable Goods Orders (Thursday, February 29) – This report will provide insights into the strength of business investment and economic momentum in the US.
US PCE Price Index (Friday, March 1) – As the Fed’s preferred inflation gauge, this data will heavily influence monetary policy expectations. If inflation remains persistent, the Fed may maintain higher interest rates for longer, further strengthening the US Dollar.
Additionally, BoE policymakers’ speeches and economic updates from the UK will be closely watched to gauge the central bank’s rate-cut trajectory.
Conclusion: Pound Outlook
The GBPUSD pair remains under selling pressure due to a combination of a stronger US Dollar and a dovish Bank of England. While the Fed expected to hold rates steady in the near term, market sentiment could shift based on upcoming inflation data and Fed officials’ guidance.
Meanwhile, the UK economy faces challenges from weak consumption, a slowing growth outlook, and potential trade disruptions. With the BoE signaling the possibility of multiple rate cuts in 2025, the Pound may continue to struggle against the Dollar in the coming months.
Investors and traders should closely monitor policy developments in both the US and UK, as well as key economic indicators, to assess future price action in the GBPUSD exchange rate.
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