The Pound Sterling (GBP) experienced a slight dip against the US Dollar (USD) during Wednesday’s London session, but maintained its gains from Tuesday, holding above the critical 1.2300 support level. The GBP/USD pair edged lower as the US Dollar saw a modest recovery, with the US Dollar Index (DXY), which tracks the Greenback’s performance against six major currencies, rising slightly from its two-week low of 107.90.
Despite this recovery, the US Dollar could face some selling pressure as its safe-haven demand appears to have diminished. The Greenback’s appeal as a safe haven has waned due to the US administration’s tariff plans under President Donald Trump being less aggressive than originally anticipated. On Tuesday, Trump announced a 10% tariff on China, set to begin February 1, as well as a 25% tariff on other North American economies. This contrasts with his campaign threats of imposing 60% tariffs on China, which had initially spooked investors.
Market analysts suggest that the more balanced approach to tariffs has reduced the risk premium associated with the US Dollar. Additionally, this tempered tariff stance may help ease inflationary pressures, leading to expectations that the Federal Reserve (Fed) will maintain its current interest rate levels for an extended period.
According to the CME FedWatch tool, traders are increasingly confident that the Fed will keep its key borrowing rates within the 4.25%-4.50% range for the next three policy meetings.
Pound Sterling Shows Strength, BoE Rate Cut Imminent
The Pound Sterling performed solidly against its major peers on Wednesday, bolstered by favorable market sentiment for risk-on currencies amid the uncertainty surrounding Trump’s tariff plans. However, GBP’s outlook remains clouded by the near certainty that the Bank of England (BoE) will lower interest rates by 25 basis points (bps) to 4.5% during its upcoming policy meeting in February.
The UK’s weak inflation and December Retail Sales data, along with a slowdown in labor demand in the three months to November and moderate GDP growth, have prompted traders to price in a BoE rate cut next month. Nonetheless, wage growth remains a concern for the BoE, as rising wages are a key driver of inflation in the service sector. The Office for National Statistics (ONS) reported on Tuesday that Average Earnings Excluding Bonuses rose by a robust 5.6%, surpassing the estimated 5.5% and the previous 5.2%.
Looking ahead, investors are awaiting the release of the preliminary S&P Global/CIPS Purchasing Managers Index (PMI) data for January, due on Friday. GBP/USD is attempting to break above the 20-day Exponential Moving Average (EMA) at around 1.2360, having rebounded from a fresh one-year low of 1.2100 on January 13.
The 14-day Relative Strength Index (RSI) has moved up to around 43.50 from a lower range of 20.00-40.00, indicating that bearish momentum has abated, at least for now.
On the downside, the GBP/USD pair may find support near the October 2023 low of 1.2050. On the upside, the key resistance level will be the round figure of 1.2400.
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