Pound Sterling Outperformance Shows the UK Isn't Very 'Tariffable'

File image of Donald Trump. Official White House Photo by Shealah Craighead.

Pound sterling outperforms on new Trump tariff threats, confirming that markets see the UK as relatively insulated to their rollout.

The British Pound is strengthening against peers after the U.S. President said he would tariff goods from Mexico and Canada at 25%, while announcing a surprise 10% tariff on China.

There were raised hopes that the U.S. would agree to a watered-down regime, but Trump shattered these expectations, saying on Thursday, "the proposed tariffs scheduled to go into effect on March fourth will, indeed, go into effect, as scheduled."

He reiterated that tariffs would proceed in a joint press appearance with Prime Minister Keir Starmer, saying, "I'm not seeing progress on drug flows," referencing the main reason for the Canadian and Mexican tariffs.

The Dollar is the FX beneficiary to the tariff confirmation, with the Pound-to-Dollar exchange rate falling to 1.2609.

Obvious victims were the Canadian Dollar and Mexican Peso, but the Euro endured a decline of equal measure as markets know the European Union is in Trump's sight.

"Currencies of (potential) tariff victims suffered the biggest setback," says Mathias Van der Jeugt at KBC Markets.

Following the data, the Pound-to-Euro exchange rate rose to 1.2131, its highest level since December 19. The Pound was even higher against the safe-haven Franc and Yen.

In short, the market doesn't think the UK is very 'tariffable.'

Above: GBP performance on February 27 following Trump's assertive comments on tariffs.

The FX market is trading the British Pound as something of a tariff safe-haven owing to relative confidence that the UK isn't as economically exposed to tariffs as the major exporters, such as the EU.

The UK is one of the only countries in the world to have a neutral trade relationship with the U.S. in goods, i.e. the UK imports a similar value of U.S. goods as the U.S. imports from the UK.

ONS figures for 2023 show that the UK imported £57.9BN of goods from the United States and exported £60.4BN. Official U.S. data actually shows the U.S. runs a rare trade surplus with the UK.

📈 Quarter 2 Investment Bank Forecasts for GBP vs. EUR. See the Mean, Highest and Lowest Targets for the Coming Months. Find Out More.

March 04 is set in the calendar for when a decision on tariffs on Mexico and Canada will be announced following a month of negotiations and concession making.

Trump said on Thursday that the two neighbours haven't done enough to stem the flow of Fentanyl across their borders and tariffs would, therefore, be applied at 25%.

Although there has been a noticeable foreign exchange market reaction, it will be limited by a reflexive market memory that Trump is a negotiator and will yet come to the party.

For example, even once an order has been signed, it can soon be rescinded. During his first term, he overturned tariffs on Mexico within days.

"The lesson from Trump’s actions so far has been that, until it is written in black and white in an executive order, the tariff news can still change. The other lesson is that, even then, the rules can change again," says Philip Shaw, an economist at Investec.

Nevertheless, the market is clearly nervous, sensing that the President is serious.

"The political calculus would suggest that the president will be forced to follow through on his threats at some point," says Karl Schamotta, Chief Market Strategist at Corpay.