GBP/USD rises above 1.2200 as Trump's team considers a gradual increase in tariffs

• GBP/USD strengthens as US President-elect Donald Trump's economic team considering a gradual increase in import tariffs boosted investor confidence.
• Trump's incoming administration evaluates a phased approach to implementing tariffs to avoid a sharp inflationary spike.
• The US Dollar Index pulls back from 110.18, the highest level since November 2022.

GBP/USD breaks its five-day losing streak, rebounding from its 15-month low of 1.2099, recorded on Monday. The GBP/USD pair remains above 1.2200 during the Asian trading hours on Tuesday as the Pound Sterling (GBP) gains ground amid improved investor confidence.

The increased investor confidence is attributed to reports about US President-elect Donald Trump's economic team considering a gradual increase in import tariffs boosted investor confidence. According to Bloomberg, Trump's incoming administration is evaluating a phased approach to implementing tariffs, aiming to prevent a sharp rise in inflation while managing trade policy adjustments.

However, the upside of the Pound Sterling could be limited due to concerns over stagflation in the United Kingdom (UK) amid persistent inflation and stagnant economic growth. Additionally, a recent surge in UK government bond yields has sparked worries about the country's fiscal health. Investors have been offloading UK gilts, driven by fears of mounting debt, sluggish growth, and inflation risks. These concerns contribute to the GBP's relative weakness.

The US Dollar Index (DXY), which measures the US Dollar's performance against six major currencies, corrects downwards after reaching its highest level at 110.18 since November 2022. At the time of writing, the DXY maintains its position near 109.60. The USD gained strength following robust US labor market data for December, which is expected to support the US Federal Reserve's (Fed) decision to maintain interest rates at current levels in January.

Additionally, the reinforced hawkish sentiment surrounding the Fed's policy outlook sparked a rise in US Treasury yields, with the 2-year yield reaching 4.42% and the 10-year yield rising to 4.80% as of Monday. The higher yields are helping the Greenback stay near recent highs. The US Producer Price Index (PPI) for December will take center stage due later on Tuesday.