Pound Sterling Drops Against Dollar After Trump's Tariff "Power Play"

Image: Pound Sterling Live.

The Dollar rose after Donald Trump said he would likely move to impose tariffs from February 01.

Trump said late on Monday that he was still considering a universal tariff on all foreign imports to the U.S., but said he was "not ready for that yet."

The universal tariff is considered the most pro-USD outcome of his potential tariff policy, as it has significant inflationary implications for the U.S. while penalising major exporters to the U.S., such as China and the Eurozone.

"You'd put a universal tariff on anybody doing business in the United States because they're coming in and they're stealing our wealth," he said, adding that implementation could be "rapid."

Trump also signed an executive order "addressing unfair and unbalanced trade". It will investigate the feasibility of "implementing an External Revenue Service (ERS) to collect tariffs, duties and other foreign trade-related revenues."

These developments are as hawkish as possible and will limit any USD weakness going forward, as traders will be wary of selling dollars. Trump is moving fast and will maintain a strategy of sowing uncertainty before suddenly surprising everyone with his decisions.

"Trump’s day-one delay on tariffs is no retreat - it’s a power play, and the stakes are sky-high," says Nigel Green, CEO of deVere Group. "Is this a bold negotiation tactic or a reckless gamble? Either way, the consequences could be seismic."

At the very least, the threat of tariffs and Trump's leadership style makes for a volatile FX environment that ultimately favours Dollar strength.

The Dollar index - a measure of USD performance against a basket of currencies - rose as much as 0.7%, the most since December 18 following the comments.

The Pound to Dollar exchange rate rose 1.30% on Monday but turned tail in early Asian trade as markets digested the news, and is lower by half a per cent at 1.2262.

GBP/USD investment bank consensus forecast for 2025. See the median, mean, highest and lowest targets, giving a highly accurate forecasting resource. Request your copy now.

Trump also said overnight that he would impose tariffs of as much as 25% on Mexico and Canada in response to the flow of illegal migrants and drugs crossing the borders, sending the CAD and MXN hurtling lower.

All this tariff talk came as a surprise: earlier in the day, media reports said Trump had asked federal agencies to look into tariffs, suggesting the issue was not an immediate concern. It signalled a more pragmatic approach was being adopted.

This lured FX markets into complacency, making the new threats all the more jarring.

"We're thinking in terms of 25% on Mexico and Canada because they're allowing vast numbers of people” into the US, Trump said in response to questions from reporters in the Oval Office on Monday night. "I think we’ll do it Feb. 1."

"Canada’s a very bad abuser," Trump said, referencing fentanyl and migrants crossing the northern border.