A resilient domestic economy remains the key driver supporting the GBP going forward. Conversely, ongoing uncertainty surrounding U.S. trade policy continues to weigh on the USD outlook.

GBP: What gives?

GBP/USD followed the broad USD moves across the board which, in turn, followed the twists and turns of the legal drama that has engulfed the Trump administration’s trade policy. In that, the GBP lagged behind the European G10 currencies, however. One explanation for the GBP’s relative underperformance could be the fact that FX investors have been reassessing the benefits that the UK has gained as a result of the recent speedy completion of the trade deal with the US. In particular, if the suspension of the Trump tariffs were sustained by the US Federal Court of Appeals, this could soften the economic blow for the likes of the EU in part because the US administration may have to resort to less onerous trade levies instead.

However, that the legal drama over the Trump tariffs could also help ease global stagflation risks over time and thus support market risk sentiment in the long term. In turn, this could give FX carry trades a boost and fuel demand for higher-yielding currencies like the GBP, helping it outperform once again.

Looking ahead to this week, the UK data calendar is relatively light, with only the final PMIs for May on the docket. FX investors will further focus on speeches by the BoE’s Andrew Bailey & Megan Greene. The resilience of market risk sentiment will play an important role as well. It should, in turn, depend on the latest newsflow surrounding the legal drama on tariffs and prospects for further abatement of the global trade war stagflation threat. It would take further improvement of global risk appetite to help the high-yielding GBP outperform again. GBP/USD should continue to follow the broad USD moves across the board as well.

USD: Trump’s legal troubles

The latest twist in the legal drama surrounding the US trade policy saw the US Federal Appeals Court temporarily block an earlier decision of the US International Trade Court to suspend President Donald Trump’s trade tariffs implemented under the International Emergency Economic Powers Act of 1977 (IEEPA). The Trump administration and the trade court have until 9 June to present their arguments before the Appeals Court decides on any long-term stay of the tariff suspension.

Trump administration officials have already highlighted that there are additional legislative routes that President Trump could pursue to preserve the status quo like Sections 122 and 232 as well as Section 338 of the Trade Act and Section 301 investigations. That being said, such tariffs would: (1) be temporary, have limited scope and require US Congressional approval (Section 122); (2) have only limited economic impact beyond existing tariffs (Section 338); and (3) apply at industry- and company-level and may take longer to implement (Sections 232 and 301). The ongoing litigation process and/or the pursuit of alternative legislative routes could slow down the implementation of Trump’s tariffs. These developments could limit Trump’s ability to use the threat of tariffs to impose trade deals on US trading partners which, in turn, could be emboldened to resist any pressure. The latest developments could prolong but not necessarily escalate the global trade war.

Looking ahead into this week, FX investors will focus on Non-farm payrolls, manufacturing and services ISM for May as well as a slew of Fed speakers that include Fed Chair Jerome Powell who is due to deliver opening remarks on 2 June. With the worst of the trade war hit to the US economy potentially behind us, investors will use the incoming data to assess the damage done by Trump’s policies. It would take negative economic surprises and/or dovish Fedspeak to encourage investors to front-load their Fed rate cut bets and thus hurt the USD

GBP/USD 4H

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