GBP/USD holds ground near 1.2450 ahead of Fed policy decision

• GBP/USD steadies due to increased risk aversion ahead of the Fed policy decision on Wednesday.
• CME FedWatch tool suggests nearly 100% odds of the Fed maintaining its policy rate within the target range of 4.25%-4.50%.
• The Pound Sterling struggles amid growing concerns over stagflation in the UK, fueled by weakening labor demand and stubborn inflation.

GBP/USD remains steady after registering losses in the previous session, trading around 1.2440 during the Asian hours on Wednesday. The pair's downside could be attributed to the increased risk aversion due to tariff threats made by US President Donald Trump.

President Trump announced plans on Monday evening to impose tariffs on imports of computer chips, pharmaceuticals, steel, aluminum, and copper. The goal is to shift production to the United States (US) and bolster domestic manufacturing.

Moreover, the GBP/USD pair could further depreciate as US Dollar (USD) receives support from the Federal Reserve's (Fed) cautious stance regarding upcoming Wednesday's policy decision. According to the CME FedWatch tool, market expectations indicate nearly 100% certainty that the Fed will maintain its policy rate within the target range of 4.25%-4.50%. However, traders will be closely monitoring Fed Chair Jerome Powell's press conference for any hints regarding the future direction of monetary policy.

The Pound Sterling (GBP) remains under pressure as concerns grow over the risk of stagflation in the UK economy, driven by weakening labor demand and persistent inflation. Traders are currently pricing in a 25 basis point (bps) rate cut in the Bank of England's (BoE) first monetary policy decision of 2025 on February 6, which would bring borrowing rates down to 4.5% amid the sluggish economic outlook.

Despite UK Prime Minister Keir Starmer's optimistic remarks on the economy in a Bloomberg interview on Tuesday, the British Pound trades cautiously. Starmer emphasized that the Labour government's top priority is "growth" and noted that the economy is beginning to "turn around." He also highlighted the strong trade ties between the United States (US) and the UK, stating that "we've got a huge amount of trade with the United States already, and the base is there for even better trading relations. We need to build on that."