Sterling steady as investors weigh BoE's financial stability report, tariff uncertainty

By Johann M Cherian

(Reuters) -Sterling was little changed on Wednesday, as investors digested the Bank of England's half-yearly report on financial stability and assessed the potential impact of trade disputes on global economic growth.

The pound was little changed against the U.S. dollar and was last at $1.35, while against the euro it firmed 0.17% to 86.14 pence.

Sentiment globally was one of caution after U.S. President Donald Trump widened his trade war by saying he would impose a 50% duty on imported copper and unveil levies on semiconductors and pharmaceuticals.

Trump said there would be announcements on Wednesday regarding "a minimum of 7 countries having to do with trade," a day after he told 14 nations that they would face sharply higher tariffs from a new deadline of August 1.

The pound has been among the top beneficiaries from a selloff in the U.S. dollar on expectations that a global trade war could also hurt the U.S. economy. The UK was also the first economy that signed a trade deal with the U.S., making it less likely to face fresh tariffs, according to analysts.

However, market participants were taken aback after last week's UK welfare bill raised expectations that the government is faced with either increasing borrowing or imposing growth-denting taxes to balance public accounts at its Autumn budget.

"Nearer term, the UK government has got itself into a fiscal mess," said Derek Halpenny, head of research, global markets EMEA & international securities at MUFG.

"Without a credible big step measure, a credibility gap will persist and risk further dangerous market disruptions. Sharp Gilt sell-offs, like recently, will be pound negative and potentially very disruptive."

The pound has gained nearly 9% against the dollar this year and is on track for its biggest annual rise since 2017. However, fiscal worries have limited gains recently and the currency is down more than 1.4% from a 2021 high it hit earlier in the month.

Meanwhile, the Bank of England released its half-yearly assessment of threats to financial stability, where it flagged that risks to financial markets remain high against the backdrop of U.S. tariffs.

Policymakers also loosened the cap on lending to riskier borrowers after a call by the government for regulators to look for ways to encourage economic growth, without risking the stability of the financial system.

(Reporting by Johann M CherianEditing by Bernadette Baum)