Looming Tariff Storm: US VAT Shift Threatens GBP/USD, FTSE 100 Stability
Summary
The introduction of reciprocal tariffs by US President Donald Trump has significant implications for the UK economy, including the inclusion of Value Added Tax (VAT) in trade barrier assessments. This move may impact GBP/USD and FTSE 100 markets as concerns about inflation and interest rates grow. UK growth holding up better than expected and traders pricing in potential benefits from an eastern European peace deal have led to higher expectations for interest rate cuts, complicating the Bank of England’s (BoE) outlook.
Economic Impact of Tariffs on UK Exports
The impact of US tariffs on the UK economy should not be underestimated. The inclusion of VAT in trade barrier assessments may spell trouble for British exports, potentially leading to higher tariffs. Washington might view the UK’s standard VAT rate of 20% as an unfair advantage. This could have significant economic implications, with some estimates suggesting that US tariffs on UK imports could shave 0.4 percentage points off UK GDP over the next two years, equivalent to around ÂŁ24 billion.
The sectors particularly vulnerable to this development include automotive, aerospace, chemicals, and machinery. Businesses will face tough choices: absorb the costs, pass them on to consumers, or shift production stateside to sidestep tariffs. 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 Cut Outlook Uncertainty
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.
GBP/USD Technical Outlook
GBP/USD is testing key resistance after breaking above the 50-day moving average in what could shape up to be a bullish trend. Bullish momentum signs are emerging from RSI (14) and MACD, indicating the potential for a breakout. A move beyond the current level may lead to a retest of the 200-day moving average and further resistance at 1.2800.
FTSE 100 Futures Technical Outlook
FTSE 100 futures have reversed sharply from record highs earlier Thursday to form a key reversal daily candle backed by notable volume pickup reinforcing the price signal. While the bearish near-term signal indicates a potential move lower, momentum signals from RSI (14) and MACD are not yet outright bearish. Patience may be warranted when considering setups in light of minor support at 8708.5 and wedge support around 8670.
Conclusion
The UK economy is poised to face significant challenges as the US introduces reciprocal tariffs with VAT included, potentially leading to higher British exports tariffs and increased inflation pressures that could challenge dovish interest rate expectations embedded in GBP/USD and FTSE 100 futures price indications. While markets have been optimistic due to better-than-expected UK growth, traders pricing in benefits from an eastern European peace deal may soon reassess their outlooks as trade tensions rise.
