Pound Sterling edges higher against US Dollar ahead of Fed's policy decision

• The Pound Sterling moves higher against the US Dollar, as investors focus on the Fed's monetary policy decision.
• Fading concerns over DeepSeek's low-cost AI model to challenge US AI models' dominance have diminished some US Dollar risk-premium.
• UK Keir Starmer expects the economy is starting to turn around.

The Pound Sterling (GBP) ticks higher to near 1.2450 against the US Dollar (USD) in Wednesday's European session. The GBP/USD pair gains as the US Dollar retrace as investors liquidate some risk-off trades built on concerns that Chinese DeepSeek's affordable Artificial Intelligence (AI) model would challenge the dominance of top chatbots, such as OpenAI and Meta, which will reduce China's technology gap with the United States (US).

The US Dollar Index (DXY), which tracks the Greenback's value against six major currencies, falls to near 107.75. The Greenback is also trading cautiously ahead of the Federal Reserve's (Fed) monetary policy decision, which will be announced at 19:00 GMT.

Traders are confident that the Fed will announce a pause in the current policy easing spell and keep interest rates unchanged in the range of 4.25%-4.50%, according to the CME FedWatch tool. In the last three policy meetings, the Fed has reduced its key borrowing rates by 100 basis points (bps). 

Therefore, the Fed's guidance on how long it will keep borrowing costs at their current levels will significantly influence the US Dollar. Apart from that, investors will also pay attention to the Fed's views on US President Donald Trump's tariffs plans and their impact on the monetary policy outlook and inflation.

White House Press Secretary Karoline Leavitt stated on Tuesday that 25% tariffs on Canada and Mexico from February 1 are "still on the books". Leavitt added that the President is "very much still considering 10% tariffs on China" from Saturday.

This week, Trump also said that he planned to impose tariffs on the import of pharmaceuticals, advanced chips, and steel in an attempt to encourage domestic manufacturing.

Daily digest market movers: Pound Sterling gains as UK Starmer hopes turnaround in economic prospects

• The Pound Sterling gains against its major peers on Wednesday as United Kingdom (UK) Prime Minister Keir Starmer indicated better trade relations with the US in an interview with Bloomberg on Tuesday. Starmer said that we've already got a "huge amount of trade" between our two countries, and the base is there for even "better trading relations". 
• Starmer's optimistic comments on trade relations with the US have eased fears that the UK will face tariff threats from Trump. On the economic outlook, Starmer said that the number one priority of our government is "growth," and the economy is on the brisk of a "turnaround".
• For more cues on the economic outlook, investors will focus on Chancellor of the Exchequer Rachel Reeves's speech in Oxfordshire on Wednesday. In it, she is expected to unveil new plans to deliver the Oxford-Cambridge Growth Corridor that will boost the UK economy, Gov.UK reported. The agency also reported that the development is expected to boost the UK economy by up to £78 billion by 2035.
• On the monetary policy front, traders are confident that the Bank of England (BoE) will reduce interest rates by 25 bps to 4.5% in its first policy meeting of the year on February 6. Traders have priced in a 25 bps interest rate reduction as the UK inflation grew at a slower-than-projected pace and Retail Sales surprisingly declined in December. Also, the labor demand has slowed due to Rachel Reeves' decision to hike employers' contributions to National Insurance (NI).

Technical Analysis: Pound Sterling rebounds from 1.2400

The Pound Sterling regains ground on Wednesday after correcting to near 1.2400 against the US Dollar the previous day. The GBP/USD pair rebounds as its near-term outlook remains firm, given it holds the 20-day Exponential Moving Average (EMA), which trades around 1.2400. However, the 50-day EMA near 1.2510 continues to be a major barrier for the Sterling bulls.

The 14-day Relative Strength Index (RSI) moves higher above 50.00 from the 20.00-40.00 range, suggesting that the bearish momentum has ended, at least for now.

Looking down, the January 13 low of 1.2100 and the October 2023 low of 1.2050 will act as key support zones for the pair. On the upside, the December 30 high of 1.2607 will act as key resistance.