GBP/USD falls to near 1.2300 as traders adopt caution ahead of Trump's economic policies

• GBP/USD depreciates following news that President Trump intends to direct federal agencies to review tariff policies.
• Traders speculate that Trump's policies could lead to inflationary pressures, possibly restricting the Fed to just one more rate cut.
• UK gilts demand rose following weaker-than-expected Retail Sales data for December.

GBP/USD loses ground after registering more than 1% gains in the previous session, trading around 1.2300 during the Asian hours on Tuesday. The pair faced challenges as the US Dollar (USD) regained ground after recent losses in the previous session, supported by news that President Donald Trump intends to direct federal agencies to review tariff policies and evaluate the United States' trade relationships with Canada, Mexico, and China.

The US Dollar Index (DXY), which tracks the performance of the US Dollar against six major currencies, trades around 108.30 after trimming recent gains. The US Dollar receives downward pressure as the US Treasury yields on 2-year and 10-year bonds remain subdued at 4.23% and 4.54%, respectively, at the time of writing.

According to the CME FedWatch tool, traders anticipate that the US Federal Reserve (Fed) will maintain borrowing rates within the current range of 4.25%-4.50% over the next three policy meetings. However, investors speculate that policies under Trump's administration could trigger inflationary pressures, potentially limiting the Fed to only one additional rate cut.

The Pound Sterling (GBP) strengthened as demand for United Kingdom (UK) gilts increased following weaker-than-expected UK Retail Sales data for December. Monthly Retail Sales contracted by 0.3%, contrary to expectations of a 0.4% growth, which was anticipated to follow the 0.1% increase in November.

The unexpected drop in UK Retail Sales has reinforced dovish expectations for the Bank of England (BoE). Analysts at Oxford Economics forecast that the BoE may reduce interest rates by 100 basis points (bps), bringing them down to 3.75% by the end of the year.