Bank of England Governor Andrew Bailey addressed the Lords Economic Affairs Committee, discussing the ambiguous impact of trade tariffs on inflation compared to economic growth. He noted the unpredictability of US import tariffs and observed market volatility and positioning changes in April, though there was no severe stress in markets.

Bailey also mentioned a reassessment of overweight positions in US assets and observed signs of a softening labour market. He highlighted potential reductions in wage settlements while citing the impact of increased National Insurance contributions on the labour market.

**Impact on GBP/USD Rates**

On Tuesday, the GBP/USD remained bullish, rising by 0.7% to 1.3620. The Bank of England’s primary role is to maintain price stability, which it achieves by adjusting base lending rates, impacting the Pound Sterling.

When inflation exceeds targets, the BoE raises rates, making UK investments more attractive. Conversely, if inflation falls below target, the BoE may lower rates to stimulate economic growth, which can negatively affect the Pound.

In extreme cases, the BoE uses Quantitative Easing to increase credit flow by purchasing assets, often weakening the Pound. Conversely, Quantitative Tightening, enacted when the economy strengthens, usually boosts the Pound.

From Bailey’s comments before the committee, it’s clear that the influence of trade tariffs on inflation remains difficult to pin down with precision. While tariffs might dampen demand and weigh on growth, the inflation response has proven far less consistent. It’s this variability that forces us to consider a more careful approach when assessing price pressures driven by trade policy. The instability created by US import decisions—rarely telegraphed in advance—adds a further layer of complication, not just for policymakers, but also for anyone managing exposure across asset classes.

Throughout April, we witnessed noticeable repositioning in markets. Though there wasn’t anything approaching panic, the shift in risk appetite has been evident. Investors began reducing exposure to US assets, a move that Bailey linked partly to greater uncertainty around labour dynamics and forward guidance. As growth expectations recalibrate, the correlation between softer job markets and anticipated rate moves will likely heighten. We should take note here: the job market isn’t tumbling, but signals—like easing wage agreements—do suggest that the pressure from earlier inflationary wage spirals may have begun to fade.

The added burden of increased National Insurance contributions has also contributed to the current tone. While this doesn’t shift the trajectory of wages in isolation, it does tax household budgets, possibly subduing spending and hiring over the near term. What we’re seeing is not necessarily dramatic, but enough to alter rate expectations, especially if the Bank continues to view domestic demand as vulnerable.

**Response of the Currency Market**

Sterling reflected some of this underlying confidence on Tuesday, posting a solid climb against the US dollar. That strength underscores how responsive the currency remains to changes in interest rate differentials. When expectations lean toward rate stability or even an increase in the short-term, the currency tends to respond positively. For those involved in forward pricing, the current bias suggests tighter monetary conditions could persist slightly longer, assuming inflation holds firm.

However, if we continue to detect signs of demand softening and wage restraint, the case for loosening would build. We know the Bank uses its policy toolkit depending on how inflation trends relative to its 2% aim. If inflation looks sticky, as it did for much of last year, rate hikes remain the preferred lever. But when prices moderate below the target, rate cuts come back into the conversation. This balancing act is at the heart of short-term rate strategy.

Where tools like Quantitative Easing were once deployed to support credit flow, such action tends to proceed only in stressed environments. Conversely, rolling back those asset purchases—commonly called Quantitative Tightening—tends to support currency strength, as it implies confidence in the economic baseline. For now, a continued preference for balance-sheet reduction suggests the central bank feels the current backdrop is resilient, albeit mixed.

Over the coming sessions, derivative flows should reflect not only macro guidance but adjust for headline sensitivity. We would be careful around labour data and central bank commentary. Forward volatility surfaces may begin to steepen again if signs point to indecision on rate timing or further ambiguity related to trade policy responses. In particular, short-dated interest rate expectations will likely remain the core input across swaps and FX exposure alike.

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