US-China Tariff Deal: Pound Sterling Forecasts REVISED vs Euro and Dollar, Again

May 12, 2025 - Written by Ben Hughes

STORY LINK US-China Tariff Deal: Pound Sterling Forecasts REVISED vs Euro and Dollar, Again

During the past month, investment banks rushed to re-write their currency forecasts with most expecting a notably weaker dollar due to US economic damage from high tariffs and a loss of confidence in US assets.

Another major U-Turn by the Administration and agreement to cut US-China tariffs sharply for 90 days has up-ended market expectations once again and could force another re-think by banks.

There will, however, still be concerns over fresh setbacks and uncertainty will inevitably remain extremely high.

Equity markets posted strong gains and the dollar surged while there were sharp losses for defensive assets and US recession fears have also eased.

Potential critical FX areas to watch will be 1.10, 150 and 1.30 for EUR/USD, USD/JPY and GBP/USD respectively.

At Monday’s European open, US Treasury Secretary Bessent announced that the US and China had agreed to cut tariffs by 115% for 90 days from May 14th.

Most US imports from China will now be subjected to a 30% tariff with a 10% tariff on US exports to China.


At this stage, the US weighted average tariff rate is now around 12% compared with the post-liberation day peak of 28%.

Risk appetite rebounded strongly on the day while demand for defensive assets declined sharply.

The yen, Swiss franc Euro and gold all registered heavy losses on the day while confidence in a near-term Federal Reserve rate cut dipped further.

The Pound to Dollar (GBP/USD) exchange slumped to 4-week lows at 1.3140 before a recovery to 1.3200.

The Euro to Dollar (EUR/USD) exchange rate slumped to 1-month lows at 1.1073 before a tentative correction to 1.1120.

ING commented; “The current EUR/USD correction could extend below 1.1100 to the 1.10 area, but we suspect any moves sub-1.10 will not be sustained. After all, we’re still waiting to find out what impact the tariff story has had on US consumption. And perhaps more importantly, the German fiscal stimulus story is real.”

USD/JPY also surged to highs just above 148.50 before a retreat to around 148.00.


According to ING; “long yen has been one of the most crowded trades and the USD/JPY rally could have further to run – perhaps to 150.”

TS Lombard economist Dario Perkins commented; “It helps that Scott Bessent has become the main spokesman for Trump 2.0. He has a real talent for “sanewashing” policies to make them look intellectually coherent and “market friendly”.

According to ING; “Although the de-escalation of the trade war benefits both economies, the agreement, which significantly lowers tariffs without any concessions, is likely to be viewed as a particular victory for China. China had previously demanded a reduction in tariffs before negotiations, and this now seems to have been achieved.”

Rabobank noted that there was still a high degree of uncertainty; “the world remains in a geopolitical flux as the architecture hammered out at Bretton Woods appears to be breathing its last and Great States vie to shape the emerging global order.”

Capital Economics chief Asia economist Mark Williams also noted reasons for caution; “This is a substantial de-escalation. However, the US still has much higher tariffs on China than on other countries and still appears to be trying to rally other countries to introduce restrictions of their own on trade with China.”

He added; “In these circumstances, there is no guarantee that the 90-day truce will give way to a lasting ceasefire.”

A key factor is that fears surrounding the US economy eased to some extent and yields moved sharply higher on the day.

Scotiabank commented; “The US 2Y yield is also up an impressive 11bpts on the day—reflecting a significant reassessment of the outlook for Fed cuts—and providing the USD with considerable fundamental support via spreads as yield increases in other developed government bond markets fail to keep pace.”

Paul Diggle, chief economist at investment group Aberdeen noted; “Away from financial markets, in the real economy, businesses will still be delaying investment decisions. However, this probably reduces some of the recessions risks.”

Danske Bank added; “While the easing does not naturally alleviate all of the negative consequences already seen in international trade and consumer/business sentiment, in our view today’s announcement significantly reduces the risk of an outright recession down the line.”

Fed Chair Powell will feel vindicated in his refusal to take early action.

Traders now consider that the chances of a June rate cut have dipped below 10%.

Markets will still be wary over further U-turns.

Aberdeen’s Diggle added; “It’s important not to over-extrapolate, the more markets are up, the more Trump may feel he can push again. And the economic slowdown is only just getting underway.”

Deutsche Bank currency analyst George Saravelos warned against just focussing on trade; “The one policy area where uncertainty remains very high is the US fiscal stance, with visibility still low on how the Republican fiscal hawks and doves will reconcile their differences. The US budget is critical in obtaining greater medium-term visibility for US growth, the Fed and the dollar.”

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