Published by Global Banking and Finance Review
Posted on May 12, 2025
By Medha Singh
(Reuters) -The pound slumped against a stronger dollar on Monday but firmed against the euro and yen as the United States and China temporarily cut reciprocal tariffs following negotiations over the weekend.
The U.S. and China agreed to temporarily slash tariffs in a deal that surpassed expectations as the de-escalation in the trade war between the world's two biggest economies sparked risk appetite globally.
Sterling dropped 1% to a four-week low at $1.318, while the euro dipped 0.3% to a more than five-week low at 84.33 pence.
The UK has closed two trade deals this month, with the U.S. and India. Meanwhile, the Bank of England cut interest rates on May 8 by a quarter of a point, although a surprising three-way split among policymakers highlighted how Trump's tariffs continue to cloud the economic outlook.
"The pound has received support from an improved trade picture for the UK as well as from a hawkish-leaning Bank of England," said ING strategist Francesco Pesole.
"Positioning imbalances, improved risk sentiment, and the upcoming EU-UK summit on May 19 may well keep EUR/GBP pressure, with a break below 0.840 now appearing increasingly likely."
Britain's foreign minister will host European peers on Monday to discuss support for Ukraine and greater regional defence cooperation in the run-up to Prime Minister Keir Starmer's summit with European Union leaders next week.
Starmer is hoping on May 19 to clinch a new defence agreement with the bloc and improve post-Brexit trade ties.
Apart from U.S. inflation and retail sales data, it is also a busy week for UK economic data that could offer hints on the BoE's next steps.
Britain's employment data is due on Tuesday, while GDP and manufacturing data will be released on Thursday.
Bank of England monetary policymaker Megan Greene and BoE Deputy Governor Clare Lombardelli said inflation measures were moving in the right direction but the latter warned she was still cautious and would wait for evidence of the slowdown.
Among major developed market currencies (G10), sterling tends to be more volatile and sensitive to risk sentiment than traditional safe havens like the Japanese yen and Swiss franc.
It rose 1% at 195.31 versus the Japanese currency.
The dollar index surged to a more than one-month high as investors priced in fewer interest rate cuts from the U.S. Federal Reserve.
(Reporting by Medha Singh in Bengaluru, editing by Ed Osmond)
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