Pound Sterling 'Safe Haven' Status to Be Tested

Summary:

Although perceived as a 'safe haven' in the tariff trade, the Pound still faces some squeeze points.

News reports rolling in ahead of the 'Liberation Day' tariff announcements - due at about 21:00 BST - show a growing preference for a flat universal tariff.

If the flat-rate tariff rate is surprisingly high, a severe post-tariff market selloff could ensue. Here, Pound Sterling could fall against the Euro and Dollar but rise against the Australian and New Zealand Dollars and other risk-sensitive currencies.

However, other reports point to a more nuanced set of announcements with the door left ajar to negotiations, which could allow the recent FX market function to persist, whereby the UK currency is seen as a relative 'safe haven' amidst the tariff noise.

The Pound's 'haven' status in the tariff trade is largely because of the UK's favourable trade relationship with the U.S., which means the world's biggest economy often runs a trade surplus in goods with the UK.

This puts it well down the list of problem countries that the U.S. wants to reorganise its trade relationships).

"There are a number of scenarios for the impact on the UK, but our sense is that the UK escapes the worst excesses of tariffs due largely to a relatively benign trade position with the US. That should be GBP supportive," says Kamal Sharma, FX Strategist at Bank of America.

"While no outright bullish GBP theme has emerged, we have noticed clients using GBP as a numerator more and more. EURGBP puts, GBPAUD calls, and GBPCAD calls have all been going through," says a new note from Spectra Markets.

Pound Sterling 'Safe Haven' Status to Be Tested_1

Above: The UK and Australia stand out as running rare goods trade deficits, image courtesy of Corpay's Karl Schamotta.

However, there are some significant tail risks for foreign exchange markets more broadly, and the Pound specifically.

One of these is the prospect of a flat blanket tariff, which is said to be increasingly favoured by the administration. This would pose significant problems for UK exporters and could challenge the Pound's ongoing resilience to tariffs.

If the Pound has benefited thus far, it is logical to assume that any unwind of a 'safe-haven' premium could be notable.

We would also be wary that the tariffs, if severe enough, trigger a market rout that would hurt the Pound against the traditional safe havens likes the Dollar, yen and franc.

The Pound-to-Euro exchange rate would also come under pressure in a broader market rout. However, gains against market-sensitive currencies like the Australian and New Zealand Dollars - as well as developing market names - would also be expected.

"Talking with clients, the consensus appears to be for 10-15% blanket tariffs (maybe closer to the 10% mark), broadly similar to our house view. However, recent media reporting mentioned a 20% tariff baseline, which would be higher than expectations and risk-off," says Andrzej Szczepaniak, Senior European Economist at Nomura International.

Pound Sterling 'Safe Haven' Status to Be Tested_2

Above: S&P 500 shows markets have settled in anticipation of the announcements.

Trump is poised to unveil sweeping new trade measures on Wednesday, with investors and global partners anxiously awaiting details of a tariff strategy that could reshape U.S. trade relations and roil global markets.

According to individuals familiar with internal deliberations, the Trump administration is weighing several competing tariff structures, including a tiered system, a customised reciprocal model, and a flat global rate, Bloomberg reported.

Each approach represents a different method for delivering on the president’s long-promised campaign to "level the playing field" on trade.

Broad Application to Rope in UK Exports

Flat-rate levies could apply widely, including to countries with which the U.S. does not have a trade imbalance, Bloomberg reported. This would include the UK, which the U.S. enjoys a rare trade surplus with.

While simple to administer, such a model risks triggering broad retaliatory action and complicating existing trade relationships.

Sources cited by Bloomberg noted that the president has not made a final decision, even as the announcement looms. The event is scheduled to take place in the White House Rose Garden at 4 p.m. Eastern Time.

While the tariff move has been framed as pro-worker and revenue-generating, questions persist as to whether the goal is negotiating leverage or a permanent shift in trade strategy.

Trump’s aides are reportedly aiming to raise $700 billion annually in tariff revenue, a figure that would mark one of the most aggressive trade policy pivots in modern U.S. history.

The market’s reaction so far has included sell-offs in equities, pressure on the dollar, and elevated caution in the corporate bond market, according to the Financial Times.

Multiple Models Under Consideration

Under an alternative tiered approach, countries would be grouped into bands based on their existing tariffs and non-tariff barriers, with levies imposed at either 10% or 20%. The highest rates would target nations deemed the most egregious offenders in terms of protectionist practices.

An alternative reciprocal model—earlier touted by administration officials—would set individualised tariffs that mirror the trade barriers imposed on U.S. exports by specific countries.

Though this strategy had gained traction in recent weeks, it is reportedly no longer the leading option under discussion.

Tariffs to Take Immediate Effect

White House Press Secretary Karoline Leavitt stated the tariffs would be "effective immediately," while Treasury Secretary Scott Bessent suggested the rates could act as a cap, with countries given the opportunity to negotiate them down post-announcement.

According to the Financial Times, investors remain on edge, with many fund managers opting to reduce risk exposure ahead of the event. Market volatility has ticked up in recent days, with the VIX index rising to 22, above its long-term average.

"People are doing aggressively nothing," said Ed Al-Hussainy of Columbia Threadneedle Investments, reflecting a general market hesitancy as traders await clarity.

Potential Disruption and Ongoing Uncertainty

Tariffs are expected to apply even to goods already en route to the U.S., raising immediate concerns for supply chains. While the official line suggests midnight enforcement, logistical complexities may delay implementation, as seen with earlier measures targeting auto and Canadian imports.

The administration’s internal debate remains intense, reflecting uncertainty not only in strategy but in policy objectives.

As TD Cowen’s Christopher Krueger put it, “It should answer the biggest question from markets, which is if the tariffs are a means to an end, or the end.”

Source: Poundsterlinglive

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