GBP/USD holds gains near 1.2550, driven a decline in US Treasury yields

• GBP/USD edges higher as the US Dollar remains subdued amid weaker Treasury yields.
• US Treasury yields declined by approximately 2% on Monday, with 2-year and 10-year yields at 4.24% and 4.53%, respectively.
• The Pound Sterling remains subdued due to increased dovish bets on the BoE's policy outlook for 2025.

GBP/USD retraces its recent losses from the previous session, trading around 1.2550 during the Asian hours on Tuesday. This upside of the pair could be attributed to the subdued US Dollar (USD) amid weaker US Treasury yields.

The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against its six major peers, remains subdued at around 108.00. The Greenback faced challenges as US Treasury bond yields depreciated by around 2% on Monday. 2-year and 10-year yields stood at 4.24% and 4.53%, respectively.

The Federal Reserve signaled a more cautious outlook for additional rate cuts in 2025, marking a shift in its monetary policy stance. This development highlights uncertainties surrounding future policy adjustments amid the anticipated economic strategies of the incoming Trump administration.

The risk-sensitive Pound Sterling (GBP) could face challenges due to the heightened geopolitical risks stemming from the prolonged Russia-Ukraine conflict and ongoing tensions in the Middle East. Israel's ambassador to the United Nations, Danny Danon, issued a stern warning on Monday to Yemen's Iran-backed Houthi militants, urging them to cease their missile attacks on Israel, per Reuters.

Additionally, the British Pound came under pressure as traders slightly increased their dovish bets on the Bank of England's (BoE) policy stance in 2025. Market expectations now reflect a 53-basis-point (bps) interest rate reduction for next year, up from the 46 bps projected following the December 19 policy announcement, during which the BoE held rates steady at 4.75% with a 6-3 vote split.