UK-US Tariff Agreement Benefits UK Exports
The UK government announced on Monday that the tariff reduction agreement signed by US President Trump and UK Prime Minister Starmer has officially taken effect. The agreement specifies that British car manufacturers exporting to the US can enjoy a 10% tariff quota, significantly lower than the previous 27.5%. Additionally, tariffs on aircraft engines and parts have been completely removed.
Although the agreement benefits UK exports, issues regarding tariffs on steel and aluminum products remain unresolved, and the UK may still face higher tariffs starting from July 9th. The UK government emphasized its commitment to continue pursuing zero tariffs for key steel products to remove obstacles for the manufacturing sector's exports.
UK Economy Records Fastest Growth in Q1
According to the UK's Office for National Statistics, the UK economy grew by 0.7% in the first quarter of 2025, the fastest pace in a year, significantly surpassing the weak 0.1% growth in the fourth quarter of 2024. The economic growth was mainly driven by homebuyers rushing to purchase before the tax relief policy expiration and manufacturers accelerating production to respond to increased US import tariffs.
Although the UK's GDP fell 0.3% month-on-month in April, this was largely due to one-off factors. The Bank of England expects economic growth of about 0.25% in the second quarter of 2025, indicating that resilience remains in the economy. Auditing firm RSM UK noted that recent weakness in consumer spending and hiring is mostly a short-term response. As uncertainty subsides, consumer confidence is expected to recover, suggesting the labor market's toughest period may have passed.
Real Estate Market Rapid Recovery Boosts Loan Uptake
The Bank of England data shows that in May, the number of mortgage approvals for house purchases rose from 60,656 in April to 63,032, exceeding expectations, indicating a rapid market recovery following the April end of the tax relief policy. Remortgage approvals also saw the largest increase since February 2024.
Net mortgage lending increased by £2.054 billion in May, a sharp contrast to the nearly £800 million decrease in April, reflecting a revival in real estate transaction activity. Hargreaves, head of financial services at KPMG UK, pointed out that expectations of future interest rate cuts and a stable employment market will continue to boost demand for home buying, consolidating the recovery in the housing market.
Pound Strengthens on Economic Revival and Rate Cut Expectations
In the backdrop of improving economic data, trade export benefits, and a recovery in real estate and employment, the pound has risen strongly recently, achieving its strongest monthly performance against the US dollar in nearly two years.
The market generally expects the Bank of England to cut rates by 0.25 percentage points twice in the second half of 2025, lowering the rate from 4.25% to 3.75%, further supporting consumer spending and borrowing demand. Pound traders have been augmenting their positions, betting that the mild economic recovery and room for rate cuts will continue to strengthen the pound's exchange rate.
Slowdown in Consumer Credit Indicates Persistent Cost of Living Pressure
Bank of England data reveals that unsecured consumer credit increased by £860 million in May, although below expectations, it was higher than April, reflecting that high living costs still affect consumer willingness. Nevertheless, income growth has begun to alleviate some spending pressure. Economists believe that with declining interest rates and a stable employment market, consumer spending is expected to gradually recover.
Market Awaits Key Data and Central Bank Statements
On July 1st, the UK June Manufacturing PMI will be released, providing a reference for assessing the recovery of the manufacturing sector. Simultaneously, at 21:30 GMT, Bank of England Governor Bailey and Federal Reserve Chairman Powell will deliver public speeches, followed by the US's publication of the ISM Manufacturing PMI and May job vacancy data at 22:00. Investors are closely watching global policy directions and the pace of economic recovery to provide guidance for the pricing of the pound and global assets ahead.
