Pound Sterling gains against US Dollar despite renewed Trump's tariff threats

• The Pound Sterling recovers above 1.2400 against the US Dollar even though investors are cautious about US President Trump's threat to raise tariffs on metals.
• BoE's Pill sees strong wage growth as a major reason behind cautious interest rate guidance.
• Investors await BoE Bailey's speech on Tuesday and Fed Powell's testimony on Tuesday and Wednesday.

The Pound Sterling (GBP) ticks higher to near 1.2415 against the US Dollar (USD) in Monday's European session. The GBP/USD pair is marginally higher even though the US Dollar Index (DXY), which tracks the Greenback's value against six major currencies, is up almost 0.2%, which indicates significant strength in the Pound Sterling. 

The DXY Index gains as investors turn cautious about renewed global trade war tensions. US President Donald Trump threatened to raise 25% tariffs on steel and aluminum imports and impose reciprocal tariffs on nations he saw as engaging in unfair trade practices.

Market experts believe that the impact of a global trade war will be inflationary for the US economy. Such a scenario would be favorable for the US Dollar, as Federal Reserve (Fed) policymakers would be forced to hold interest rates at their current levels for longer. According to the CME FedWatch tool, the Fed is expected to keep interest rates steady in the policy meetings in March and May, and the likelihood of a 25 basis point (bps) interest rate reduction in the June meeting is 50%.

Going forward, investors will focus on Fed Chair Jerome Powell's testimony before the Congress on Tuesday and Wednesday. Investors would like to know the impact of Trump's tariffs on the economy and the monetary policy outlook.

On the economic data front, the Consumer Price Index (CPI) data for January is scheduled to be released on Wednesday.

Daily digest market movers: Pound Sterling gains against all its major peers

• The Pound Sterling outperforms its major peers at the start of the week as investors start digesting the Bank of England's (BoE) dovish tone on the interest rate outlook and downwardly revised Gross Domestic Product (GDP) forecasts for the year.
• BoE Governor Andrew Bailey guided a "gradual and cautious" outlook for the monetary policy in the press conference after the central bank decided to cut interest rates by 25 bps to 4.5% last week. Bailey's cautious stance on the interest rate outlook was based on expectations that United Kingdom (UK) inflationary pressures could accelerate to 3.7% in the third quarter due to higher energy prices before returning to the 2% path. 
• However, investors took Monetary Policy Committee (MPC) member Catherine Mann's vote for a 50-basis interest rate reduction, who has been an outspoken hawk, as an ultra-dovish stance on the policy outlook. Market participants expect Mann's call for a bigger interest rate cut was based on her concerns over the economic outlook. The BoE halved its GDP Growth forecasts to 0.75% for the year.
• On Friday, comments from BoE Chief Economist Huw Pill indicated that strong wage growth is the major reason behind the cautious interest rate stance. "I think strong wage growth is a reason for caution, for carefulness in the way we proceed with removing monetary policy restriction and cutting bank rate," Pill said.
• In the three months ending November, Average Earnings excluded bonuses accelerated to 5.6%, the highest figure seen since June 2024.
• Going forward, the next trigger for the British currency will be influenced by Andrew Bailey's speech at the University of Chicago Booth School of Business in London on Tuesday.

Technical Analysis: Pound Sterling rises above 1.2400

The Pound Sterling moves higher above 1.2400 against the US Dollar on Monday. However, the outlook for the GBP/USD pair remains weak as the 50-day Exponential Moving Average (EMA) continues to as resistance around 1.2500.

The 14-day Relative Strength Index (RSI) oscillates inside the 40.00-60.00 range, suggesting a sideways trend.

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.