- US tariffs in focus as VAT enters trade war calculations
- BoE rate cut outlook shaky with inflation risks rising
- GBP/USD tests key resistance with breakout potential
- FTSE 100 reversal raises questions on near-term direction
Summary
GBP/USD and the broader FTSE 100 may be nearing turning points after US President Donald Trump signed an executive order introducing reciprocal tariffs on trade partners. The order expands trade barrier assessments beyond traditional tariffs to include other levies on US imports, such as Value Added Tax (VAT). The UK was initially expected to escape the worst of the trade war due to its bilateral trade relationship with the US, but this development may have changed the game for UK markets.
For months, FTSE 100 futures have rallied on expectations the UK economy would see minimal tariff impact, allowing the Bank of England (BoE) to continue cutting interest rates. That’s also contributed to GBP/USD weakness, driven by diverging interest rate and economic growth outlooks. However, with UK growth holding up better than expected late last year and traders rushing to price in potential benefits from an eastern European peace deal, the evolving international trade picture complicates the outlook for UK inflation and interest rates.
Ticket to Stagflation?
The US decision to factor VAT into its trade barrier assessments could spell trouble for the UK economy, potentially leading to higher tariffs on British exports. With the UK’s standard VAT rate sitting at 20%, Washington may view it as an unfair advantage.
The economic impact would not be trivial, with some estimates suggesting US tariffs on UK imports could shave 0.4 percentage points off UK GDP over the next two years, equivalent to around £24 billion. Sectors such as automotive, aerospace, chemicals, and machinery would be particularly vulnerable. Businesses will face tough choices: absorb the costs, pass them on to consumers, or shift production stateside to sidestep tariffs.
Inflationary pressures—and the risk of stagflation—are therefore a concern. If firms pass on higher costs, UK inflation could edge up, challenging the dovish rate outlook embedded in GBP/USD and FTSE 100 futures.
BoE Rate Cuts Questioned
Overnight swaps markets still price in two BoE rate cuts this year—with a small risk of a third—but there has been a slight hawkish adjustment to the outlook this week.
This suggests that some of the moves driven by expectations for an aggressive rate-cutting cycle may be at risk of stalling or even reversing.
Source: Bloomberg
GBP/USD Technical Outlook
GBP/USD is testing the top of the rising wedge it has been sitting in since mid-January, having broken above the 50-day moving average late in Thursday’s session. Notably, the latest push above 1.2500 has held, whereas the two prior attempts failed.
With bullish momentum signals emerging from RSI (14) and MACD, the risk of a bullish wedge breakout appears to be building, opening the door for a potential test of 1.2613—a level the price has oscillated around in recent months.
Source: TradingView
A move beyond 1.2613 would put a retest of the 200-day moving average and resistance at 1.2800 on the table. However, if wedge resistance holds firm, bears may look for a move back toward wedge support, currently around 1.2400.
FTSE 100 Futures Technical Outlook
FTSE 100 futures look equally interesting on the charts, reversing sharply from record highs struck earlier Thursday to form a key reversal daily candle. The move was backed by a notable pickup in volumes, reinforcing the price signal.
Source: TradingView
For now, the price remains comfortably within a rising wedge, meaning the bearish near-term signal may not necessarily translate into a prolonged downside move. Momentum signals from RSI (14) and MACD—while showing early signs of rolling over—have yet to turn outright bearish, suggesting patience may be warranted when assessing setups.
Minor support is found at 8708.5, with wedge support around 8670 the next key level. A clean break beneath the latter could encourage bears to target a reversal toward support at 8489. On the other hand, a move back above Thursday’s highs would warrant retaining a bullish bias.