Sterling began the week strongly on Monday as investors weighed a domestic defence strategy alongside a series of positive British economic reports, while ongoing trade tensions between the US and China dampened demand for the Dollar. 

Overall investor sentiment was negative following President Donald Trump’s Friday announcement to double tariffs on imported steel and aluminium to 50% starting on Wednesday, coupled with Beijing’s rebuttal of allegations that it breached an agreement on critical mineral shipments.

The Pound increased by 0.53% to $1.3531 at the time of writing, mainly due to a broad weakening of the Dollar against multiple currencies.

Against the Euro, Sterling remained almost unchanged at 84.37 pence, Reuters reports. 

In the UK, investors considered how the upcoming defence review, expected to be released on Monday, might affect public spending as the country seeks to enhance its defence capabilities.

“Fiscal constraints will... limit how much the UK can invest into its defence arsenal – prompting questions around the sustainability of the government's fiscal framework,” said Deutsche Bank senior economist Sanjay Raja.

“A potentially bigger role for the UK in European defence and security will require larger incentives from the EU vis-à-vis a refined trade deal.”

There are worries that Prime Minister Keir Starmer’s government might significantly increase fiscal debt as defence spending rises, especially at a time when investors are demanding higher returns from long-term developed market debt. Yields on the benchmark 10-year gilts remained largely steady around 4.67% during the day.

On the positive note, markets welcomed a survey indicating that the decline in British manufacturing in May was not as severe as initially expected.

In addition, data from mortgage lender Nationwide showed that UK house prices in May were 3.5% higher than a year ago, boosted by buyers rushing to complete purchases before a partial tax exemption expired.

While strong consumer demand amid a generally uncertain global economic environment has supported interest in UK assets, ongoing inflationary pressures have raised concerns. As a result, investors are now anticipating just slightly more than one additional 25 basis point interest rate cut by the Bank of England this year.

The Pound is trading near its highest levels in over three years, reached last month, as investors see the UK economy as more resilient to trade risks, while assets denominated in US Dollars have weakened.