UK GDP shrank for the second month in a row, increasing the likelihood of a Bank of England interest rate cut in August to 78%. In response to the bad GDP data, the GBP/USD exchange rate fell by more than 0.59%, trading at 1.3504 after reaching a high of 1.3584. US President Donald Trump intensified the trade war by imposing 35% tariffs on Canadian goods, with some exceptions. This development reduced risk appetite among investors and caused the US Dollar to strengthen.

US Dollar Index Performance

The US Dollar Index rose by 0.26%, reaching 97.83. At the same time, data from the Office for National Statistics showed a -0.1% month-on-month contraction in UK GDP for May, following a -0.3% decline in April. This information has led to increased expectations for a rate cut by the Bank of England in August, pushing the prediction up from 64% to 78.3%. This creates pressure on the UK government to adjust fiscal policies. Traders are keeping a close eye on upcoming UK inflation and employment data, as well as US economic reports. Technical analysis shows signs of GBP/USD bears taking control, especially as the pair trades below the 20-day simple moving average, indicating potential for further volatility. The recent UK economic data, showing a second consecutive month of declining GDP, has amplified expectations regarding monetary policy. With a monthly drop of -0.1% in May following April’s contraction, various sectors are clearly struggling. The probability of an August interest rate cut by the Bank of England has jumped sharply to 78.3%. This change has immediately affected the sterling, with GBP/USD falling over half a percent to 1.3504, down from earlier highs of 1.3584.

Impacts Of Trade Policies

Meanwhile, the latest trade move from the White House, introducing new 35% tariffs on Canadian imports, has triggered increased caution among investors. As investors seek safety, the US Dollar has gained strength, pushing the Dollar Index up to 97.83, marking a 0.26% increase. This rise reflects not just current geopolitical tensions but also strong expectations about the US economy compared to its peers. Back in the UK, the two-month decline in GDP further complicates the monetary policy discussion. As domestic output shrinks and consumer confidence declines, markets have quickly adjusted their expectations for future interest rates. The 14% jump in the odds of a rate cut within a month indicates that investors are realizing that growth figures are not meeting earlier forecasts. The fall in sterling, dipping below the 20-day simple moving average, signals a shift in positions, indicating more than just short-term fluctuations. Moving forward, it is crucial to monitor economic indicators in the coming weeks. Inflation rates and employment data are on the horizon and will help shape any policy responses. A weaker inflation report alongside stagnant wage growth could lead the Bank to ease rates. Conversely, any positive surprise might dampen current expectations. This is why adaptability is key; long-term views should adjust to incoming data volatility. From a technical standpoint, there is growing support for further declines in sterling. The inability of GBP/USD to maintain its mid-range levels suggests that traders prefer to sell during rallies. Momentum appears to be shifting toward sellers, particularly as price action stays below average short-term trend indicators. While UK economic reports are attracting attention, it is essential not to overlook developments in North America, especially regarding trade policies. Changes to tariffs affect both the Canadian market and broader dollar demand. Increased tariffs lead global investors to prioritize liquidity and safety, benefiting the US currency in the short term. In preparation, we are looking for trends and direction in upcoming charts with added context. Trading volume during spikes in volatility will be particularly important, as will open interest data around key levels. This is not the moment to rely solely on historical trends; instead, it is a time that rewards those who blend real-time data with a well-thought-out strategy. Create your live VT Markets account and start trading now.

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