Official White House Photo by Molly Riley.
Fading global volatility is a distinct positive for the British Pound.
Pound Sterling ended April on a dour note, but fading investor volatility will surely mean weakness is limited.
To be sure, risks lurk in the form of next week's Bank of England interest rate decision, which could see a 'dovish' pivot result in a lower Pound, but in a world that is primarily determined by U.S. President Donald Trump's social media account, hopes that the worst of the trade war have faded matters most.
Improving global sentiment helped the Pound recover against the Euro into May 01, with GBP/EUR rising from 1.1714 to 1.1750. "Optimism around constructive trade talks and further FOMC rate cuts have boosted risk sentiment," says Samara Hammoud, FX Strategist at Commonwealth Bank.
Chinese state media report on Thursday there is "no harm" in holding trade talks with the U.S., marking the next phase in an easing in trade tensions.
"As we exit April, the initial shock of the tariff announcements appears to be waning and so far, we have not seen from Corporate America any particularly dire warnings about how much tariffs will impact profitability," says a note from Goldman Sachs.
Helping stock markets extend a recovery are rising bets that the Federal Reserve will deliver a spate of 'insurance' interest rate cuts, which will soften the blow of tariffs on the economy.
"Markets are now pricing around four 25bp FOMC rate cuts by the end of the year. We predict four 25bp cuts to the Funds rate in July, September, and December 2025, and March 2026, bringing it to 3.25%," says Hammoud.
Falling Volatility a Filip for the Pound
"Markets have now clawed back to levels seen before "Liberation Day" - prior to 2 April, when Trump reignited tariff rhetoric with aggressive reciprocal proposals. Since then, trade tensions between the US and China have escalated significantly," says Wilhelm Dalsjö, an analyst at Danske Bank.
Improving sentiment begets lower volatility, which is a key determinant of Pound Sterling performance as the UK currency rises against the Euro, Dollar, Yen and Franc when volatility is waning.
Above: EUR/GBP (top) and the S&P 500 volatility index, showing the pound rises against the euro when volatility wanes.
However, it can tend to fall against more risk-sensitive currencies such as the Australian and New Zealand Dollars, as well as the Krone and Krona.
The Pound to Euro exchange rate fell to a low at 1.1714 on April 30 before recovering back to 1.1759 at the time of writing on May 01.
The Pound to Dollar exchange rate unwinds some of its recent excesses and is lower at 1.3296, having been as high as 1.3440 on Tuesday. For now, analysts think GBP/USD weakness will be brief as the major drivers behind the Dollar selloff are still intact.
"The recent dollar bounce may be a temporary position adjustment as markets await further developments," says Paul Spirgel, an analyst at Reuters.
Easing volatility reflects a belief that the peak has been reached in the trade war, with multiple negotiations set to bring the overall tariff burden lower. Speaking on April 01 Trump acknowledged tariffs are having a negative effect on the economy in the near-term, but that the outcomes would be better in the long run.
According to a state‑run Chinese media outlet, the US government has reached out to China through various channels to begin trade negotiations.
Climbing a Wall of Worry
Improvements in sentiment and recoveries in U.S. markets come despite fundamental challenges.
Trump stated on Wednesday that Chinese President Xi Jinping needs to contact him first to initiate tariff talks.
China and the U.S. will eventually talk, but the process looks fraught and could yet provide further disappointment.
But even with successful trade talks, the U.S. economy faces significantly higher tariffs that point to a major realignment in the economy and this could bring about further U.S. Dollar weakness.
"One could rightly ask whether the world now looks better - or even remotely as good - as it did on 1 or 2 April. Objectively, that seems doubtful. Economists have aggressively slashed growth forecasts, earnings revisions have turned sharply negative, and despite the postponement of the reciprocal tariffs, US-China trade is operating at tariff levels effectively incompatible with meaningful exchange," says Danske Bank's Dalsjö.
BlackRock Investment Institute says it thinks the overall tariff rate will settle at 10%, which puts it back at levels last seen during the Second World War.
"We see tariffs becoming a permanent fixture of U.S. trade policy. A mix of rates is likely, with some countries and sectors facing steeper levies than others. But in aggregate, we expect the average U.S. effective tariff rate to settle near 10% — its highest since the 1940s," says BlackRock.
According to Susannah Streeter, Head of Money and Markets at Hargreaves Lansdown, the threat of stagflation is hanging over the world's economies, as tariffs threaten to hurt growth and domestic pressures continue to warm prices.
"There are renewed hopes that deals will be inked shortly between the US and a string of trading partners, including with Japan, South Korea and India, but the waiting list is long for agreements to be struck and the 10% blanket duties is still set to prove inflationary in the United States," she warns.