# Recovery of the British Pound Amid Tariff Uncertainty

British currency shows signs of recovery amid increasing chaos in U.S. trade policy. The pound reaches 1.3520 against the dollar during the Asian trading session, strengthening due to the weakening of the U.S. dollar. Uncertainty related to new tariff measures continues to pressure the USD, creating favorable conditions to support the pound in the currency market.

Political instability in the US weakens the dollar

The situation with American import tariffs remains in traders’ focus and raises serious questions about the direction of the U.S. currency. Last week, the U.S. Supreme Court ruled that the tariff measures were illegal and exceeded the administration’s authority. In response, new 15% tariffs on imported goods were introduced, increasing market uncertainty.

Reuters reports that the measures are in effect for 150 days, but questions remain about reimbursement of previously paid tariffs by importers. The lack of clarity on this issue adds additional pressure on the US dollar.

“This weakens the dollar in the sense that it potentially promotes growth outside the US,” said Sim Mo Siong, FX strategist at OCBC Bank in Singapore. He estimates that political instability in the United States is directing capital toward more stable currency assets, including the pound.

Strong UK economic data support the pound

While the dollar faces pressure, the UK retail sector shows impressive results. According to the Office for National Statistics (ONS), retail sales increased by 1.8% month-over-month, significantly exceeding market expectations of 0.2% growth. The previous month’s increase was only 0.4%, indicating an acceleration in economic activity.

Year-over-year, retail sales grew by 4.5%, surpassing analysts’ forecast of 2.8%. The revised figure for the previous period is 1.9% (previously reported as 2.5%), confirming consumer demand resilience in the UK. These positive economic data naturally support the pound against the weakening US dollar.

Anticipation of US inflation data

The market is focusing on the upcoming US Producer Price Index (PPI) report for January. Analysts consensus expects both core and overall PPI to increase by 0.3% month-over-month. If inflation data exceed expectations, it could create headwinds for the pound, as higher inflation may prompt the Federal Reserve to adopt a more aggressive stance, strengthening the dollar.

What drives GBP quotes in the currency market

The pound sterling ranks fourth in trading volume among global currencies, accounting for 12% of total operations. The average daily turnover with the pound is approximately $630 billion. The main trading pair, GBP/USD, known as “Cable,” accounts for 11% of all FX market transactions. Other popular pairs include GBP/JPY (“Dragon”) with 3% and EUR/GBP with 2%.

Bank of England’s role in strengthening the pound

The monetary policy set by the Bank of England (BoE) remains a key factor influencing the pound’s movement. The central bank aims for a 2% inflation target, viewing it as an indicator of price stability. The main tool for managing inflation is adjusting interest rates.

When inflation exceeds the target, the bank takes tightening measures by raising interest rates. This increases borrowing costs for individuals and businesses, curbing spending and inflationary pressures. Rate hikes usually lead to a stronger pound, as higher yields attract global investors to the UK market.

Conversely, if there is a risk of excessive economic slowdown, the Bank of England considers lowering rates. Cheaper loans stimulate borrowing for investment projects that generate economic growth. In such scenarios, the pound may experience short-term pressure.

Economic indicators and their impact on the pound

Publication of key economic indicators significantly influences the value of the pound. GDP, manufacturing activity indices (PMI), employment figures, and other data serve as a barometer of the UK economy’s health. Strong economic results, like the current retail sales data, create a basis for potential currency strengthening.

A healthy economy attracts not only foreign capital but can also justify raising interest rates by the Bank of England, further strengthening the pound. Conversely, weak economic indicators usually lead to a decline in the pound’s value on the currency market.

The importance of trade balance for the pound

A country’s trade balance reflects the difference between export and import values over a period. When the UK produces in-demand goods, foreign buyers increase demand for the national currency to make purchases, strengthening the pound. A positive trade balance creates natural support for the pound through increased demand for British assets and currency.

In contrast, a negative trade balance can put downward pressure on the pound. Therefore, trade policies, including tariffs, indirectly influence the pound’s position through their impact on trade flows and the country’s trade balance structure.