UK markets made modest gains this week, with the FTSE 100 Index rising 0.1% to trade at 8,565 points at the time of writing.
The Bank of England cut interest rates by 0.25% this week to 4.25%, but stressed it was not on a preset path to further reductions, as it prepares for the impact of US President Donald Trump’s trade policy. Whilst the cut had been expected, the central bank’s Monetary Policy Committee’s insistence that it would retain “a gradual and careful approach” to further rate reductions caused investors to reduce their bets on further rate cuts this year.
Investors are now pricing in two further rate cuts this year, with a roughly 40% chance of a third, down from 80% before the meeting, according to levels implied by swaps markets. Although a majority of five Monetary Policy Committee members supported the 0.25% cut, two favoured a bigger, 0.5% reduction and two wanted rates to stay at 4.5%.
The Bank of England’s chief economist Huw Pill was among those voting for no change. The Bank of England has been contending with the impact on prices and economic activity from the £40 billion of tax increases chancellor Rachel Reeves announced in October’s Budget, as well as the uncertainty produced by Trump’s tariff plans.
The central bank also faces the prospect of inflation rising in the coming months, partly driven by an increase in household bills. In a new set of forecasts released on Thursday, the Bank of England said inflation would peak at around 3.5% in the third quarter of 2025, before returning to the central bank’s 2% target in 2027. It added that Underlying GDP has slowed since mid-2024, with growth expected at just 1% this year and a weaker-than-expected 1.25% in 2026.
The UK has secured its first trade deal with the US since Donald Trump’s trade war, achieving tariff cuts on car and steel exports. However, a flat 10% levy on most goods remains unchanged. Announced by President Trump in the Oval Office, with Prime Minister Sir Keir Starmer joining by phone, both leaders praised the strength of UK-US ties.
Despite the breakthrough, the deal’s scope is limited and many details are still unresolved, leaving the UK facing tougher trade conditions than before Trump’s global tariffs were reintroduced last month.
Commodity markets
In the commodity markets, Brent crude futures traded around $63 per barrel on Friday and are set to end the week slightly higher, as investors assess the effects of OPEC+ output increases against trade talks between the United States and China, the world’s largest oil consumers.
US Treasury Secretary Scott Bessent will meet with China’s top economic official on the 10th May in Switzerland for negotiations over the trade war that is disrupting the global economy. Optimism around these talks is providing support to the oil market. The countries are the world’s two largest economies and the fallout from their trade dispute is likely to lower crude consumption growth.
At the same time, OPEC+ has said it will increase its oil output, adding pressure on prices. Analysts at Citi Research have lowered their three-month price forecast for Brent to $55 per barrel from $60 earlier, but maintained their long-term forecast of $60 a barrel this year. A US-Iran nuclear deal could drive oil prices down towards $50 per barrel on increased supply in the market, but if no deal were to happen, prices could go up to over $70, the analysts added.
Gold prices traded around $3,320 an ounce on Friday after a volatile week, as Donald Trump’s announcement of a trade deal with the UK raised hopes of such deals with other countries, denting the appeal of safe-haven assets. Despite losses in recent days, gold remains on track for a weekly gain.
Equity markets
US equity futures were mixed on Friday as investors assessed the impact of the US-UK trade deal, the first major agreement since the US imposed sweeping tariffs earlier this year. In Thursday’s regular trading session, the Dow Jones Industrial Average rose 0.62%, the S&P 500 gained 0.58%, whilst the Nasdaq Composite advanced 1.07%.
The Federal Reserve held interest rates steady for a third consecutive meeting this week, citing growing concerns that President Donald Trump’s tariffs could fuel inflation, increase uncertainty and weaken the jobs market. Rates haven’t been cut since December, and officials signalled a continued pause as they assess the economic impact of the trade measures.
In a press conference following the announcement, Federal Reserve chair Jerome Powell said that although the US economy remains healthy, the levies could put the central bank in a position in which both sides of its dual mandate to foster maximum employment and 2% inflation are challenged. Although early-year data pointed to robust demand, recent surveys show that businesses and consumers are increasingly anxious about the potential fallout from Trump’s trade policies.
The interest rate decision followed stronger-than-expected April non-farm payroll figures, which confirmed continued labour market strength despite growing trade-related concerns. The data led many economists to delay their forecasts for the first rate cut, now expected no earlier than September.
Separately, President Trump has proposed raising the tax rate on Americans earning over $2.5 million to nearly 40%, as part of early negotiations with congressional Republicans over a new fiscal package. The plan aims to fund sweeping tax cuts for middle and working-class households, while safeguarding Medicaid.
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