In terms of GBP/USD, it's been in a big uptrend, but we have seen volatility drop, and so far, the big 1.300 level is holding rallies. If we fail to take out 1.30 and break to the downside, we expect a major decline in the pair. The logic of the trade is oulined below.

Fundamentals

UK Public Finances

We recently had statements from the UK Chancellor - Chancellor Rachel Reeves declined to rule out hiking taxes at her next Budget, amid growing pushback from Labour MPs over welfare cuts in the wake of her Spring Statement.“Rachel Reeves faces the prospect of her newly-restored fiscal headroom being wiped out again ahead of the Autumn budget, raising the spectre of fresh take hikes in the future as she battles sluggish growth and economic headwinds.” (CITY AM)

Fresh tax hikes look on the cards as Trump tariffs loom and her financial headroon dissapears: The Chancellor had previously left herself £9.9bn of headroom, but the OBR calculated the UK was in fact, heading for a deficit of £4.4bn, forcing the Chancellor to make spending cuts in welfare and across the civil service in order to restore her headroom to just under £10bn once again.

In a press conference delivered after the Spring Statement, OBR committee member Tom Josephs said the headroom – the third-smallest such margin any Chancellor has set against the rules. Sanjay Raja, chief UK economist at Deutshe Bank, noted, “To state the obvious, the latest public finances data was even worse than the OBR expected, signalling further downward revisions to the public finances on the horizon.

Trump Potential Tariffs

Now, let's take a look at what tariffs could do to UK growth. The UK government’s official forecasters, the Office for Budget Responsibility (OBR), outlined three scenarios last week in response to Trump's expected tariff announcement. It postulates that a 20% tariff applied to all US imports could reduce growth by 0.6 percentage points in the UK next year and 0.3 percentage points thereafter. If other governments impose more tariffs on their own, the reduction to growth next year could be equivalent to 1% of GDP and 0.75 % in the following years. This would wipe out any financial headroom the chancellor has after meeting her rules on public finances, which would mean more tax rises or spending cuts against weak growth.

UK GDP

UK interest Rates

The UK interest rate is 4.5%, and this has supported the GBP, but we think this pillar of strength is about to end. The economy will not recover quickly even without tariffs, and the Bank of England will cut rates by more than the 44 bps the market is looking for – we would expect double this figure as the BoE looks through sticky inflation and focus on growth.

The market has focused to much on a weakening US economy and not ket in mind that it's stronger than most of its rivals and better able to ride out a tariff war. Keep in mind, that US GDP is far stronger than the UK's 0.1 for the last quarter, standing at 2.4%!

Sentiment

If we look at COT Net Traders positions, we can see a divergence between speculators who bought heavily into the 1.300 level and smart money hedgers who sold, which could warn of a downside break:

Technical Analysis

Below see the levels of support and resistance that we are focused on for selling GBP/USD. In our view, the risk to reward looks attractive on short trades through support.