Pound Sterling declines against US Dollar as Trump’s tax cut plan clears
The Pound Sterling (GBP) declines to near 1.2640 against the US Dollar (USD) in European trading hours on Wednesday. The GBP/USD pair faces selling pressure as the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, has shown a strong recovery move after sliding to near the 11-week low of 106.10 earlier in the day.
The Greenback bounces back strongly as bond yields gain ground after a five-day losing streak. 10-year US Treasury yields recover to near 4.33% after posting a fresh more than two-month low near 4.28% during the Asian session.
US bond yields find buyers’ interest after Republicans-controlled House of Representatives advances $4.5 trillion tax cut plan, which would also fund the deportation of migrants living in the US illegally, tighten border security, energy deregulation, and military spending, Reuters report. The injection of significant liquidity would boost inflationary pressures and force the Federal Reserve (Fed) to keep interest rates at their current levels for a prolonged period.
Meanwhile, traders have raised Fed dovish bets after weak flash United States (US) S&P Global PMI data for February showed on Friday that service sector activity contracted for the first time in over two years. According to the CME FedWatch tool, the possibility of the Fed cutting interest rates in June has increased to 65% from 47% a week ago. In the March and May policy meetings, the Fed is almost certain to keep borrowing rates steady in the range of 4.25%-4.50%.
Going forward, investors will focus on the US Durable Goods Orders and the Personal Consumption Expenditures Price Index (PCE) data for January, which will be released on Thursday and Friday, respectively. Investors will pay close attention to the US PCE inflation data as it will influence market speculation about the Fed’s monetary policy outlook.
Daily digest market movers: Pound Sterling flattens against its peers
The overall performance of the Pound Sterling against its major peers is sideways on Wednesday as investors digest dovish guidance from Bank of England (BoE) Monetary Policy Committee (MPC) member Swati Dhingra in her speech at Birkbeck on Monday. Dhingra warned about “weakness in consumption” and didn’t see it going away sooner, which is why she favored the unwinding of “monetary policy restriction”.
Traders have fully priced in two interest rate cuts by the BoE for the year. On the contrary, the commentary from Dhingra indicated that she favors more than four. "I know 'gradual' has been interpreted in the media as 25 basis points (bps) per quarter, but cutting interest rates at this pace for the remainder of 2025 would still leave monetary policy in an undesirable restrictive position at the end of the year,” Dhingra said.
In the policy meeting earlier this month, the BoE reduced borrowing rates by 25 bps to 4.5% and guided a gradual policy easing. The BoE also halved its Gross Domestic Product (GDP) forecast for the year to 0.75% and warned that price pressures could temporarily increase in the third quarter due to higher energy prices.
The outlook for the UK economy is uncertain due to potential tariffs from US President Donald Trump. Until now, Trump has imposed 10% tariffs on China and 25% on all steel and aluminum imports. He has also threatened to introduce reciprocal tariffs and 25% levies on all imports from Canada and Mexico, and he has proposed the same level of import duties on foreign cars, semiconductors, pharmaceuticals, and lumber and forest products.
Source: Fxstreet
