Sterling steadies as tariff firestorm abates

By Amanda Cooper

LONDON (Reuters) - The pound was mostly steady on Tuesday, stabilising after several days of volatile trading from the market rout induced by U.S. President Donald Trump's wide-ranging import tariffs, which have raised the risk of a global recession.

Prime Minister Keir Starmer on Monday said Britain would try to secure an economic partnership with the United States while also working to lower trade barriers with key partners around the world in the wake of Trump's tariffs.

Sterling was last up 0.1% against the dollar at $1.2747, having slid around 1.4% from where it was before Trump unveiled his tariffs on April 2.

UK exports to the United States will receive the baseline tariff of 10%, below the 20% that European Union exporters must pay, but this has not shielded the pound from the firestorm that has engulfed global markets in the last few days.

Starmer also said on Monday that his government's first reaction to higher tariffs should not be to relax public borrowing rules.

Almost all economists think Trump's tariffs will be negative for growth in the United States and Britain, but there is less consensus about the medium-term implications for UK inflation and government borrowing, which risk being negative for gilts.

Indeed, 30-year UK gilt yields rose nearly 20 basis points on Monday, the most in a day since late 2022, when British markets were racked by then-prime minister Liz Truss's failed "mini-budget".

FX broker Monex said the spike in gilt yields showed that the prospect of a loosening of the fiscal rules remained a "notable concern for markets".

Higher bond yields usually support a currency, but when there is concern about the stability of a government's finances, this relationship can break down.      

Traders expect the Bank of England to cut rates when it meets in early May, in order to counter the effects of tariffs on an already slowing economy. What happens beyond that is far less certain. 

"Our long-term view remains that UK fundamentals are better than markets currently price, now helped by tariff differentials, while the government will ultimately choose not to scrap their fiscal rules with the memory of Liz Truss still fresh in the mind. For now, though, with sentiment still in the driving seat, sterling looks set to continue trading under pressure," Monex said. 

Also in the mix is the pound's status as a "high beta" currency: one that tends to rally and fall more than the broader market, much like the Australian and New Zealand dollars.

As investors have ditched riskier, typically more volatile assets, the pound has come under pressure. Against the euro, which has benefited from the flight out of the dollar,, it has lost almost 3% in the last week.

(Reporting by Amanda Cooper; Editing by Kevin Liffey)