The GBP/USD pair lost ground on Tuesday, trading near 1.2300 during the Asian hours, following a gain of more than 1% in the previous session. The pair faced pressure as the US Dollar (USD) regained momentum, bolstered by reports that former President Donald Trump plans to direct federal agencies to assess tariff policies and review trade relations with Canada, Mexico, and China.
The US Dollar Index (DXY), which measures the USD’s strength against a basket of six major currencies, hovered around 108.30, after pulling back from recent gains. However, the USD faced downward pressure as US Treasury yields on 2-year and 10-year bonds remained subdued at 4.23% and 4.54%, respectively.
Market participants, according to the CME FedWatch tool, expect the US Federal Reserve (Fed) to keep interest rates steady between 4.25% and 4.50% for the next three meetings. Despite this, there are concerns that Trump’s potential economic policies could fuel inflation, possibly limiting the Fed’s ability to implement further rate cuts.
Meanwhile, the Pound (GBP) found support as demand for UK gilts increased following disappointing UK Retail Sales data for December. Retail Sales dropped by 0.3%, contrary to the expected 0.4% growth, following November’s modest increase of 0.1%. The weak retail performance has led to growing expectations that the Bank of England (BoE) may adopt a dovish stance, with analysts at Oxford Economics predicting a potential rate cut of 100 basis points, bringing rates down to 3.75% by year’s end.
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