Pound Sterling demonstrates strength ahead of BoE Bailey's testimony

• The Pound Sterling rises ahead of BoE Andrew Bailey's testimony before Parliament's Treasury Committee.
• Investors worry that US President Trump's tariff agenda could weigh on the US economic growth.
• Bloating Fed dovish bets have weighed on the US Dollar.

The Pound Sterling (GBP) trades higher against its major peers on Wednesday ahead of Bank of England (BoE) Governor Andrew Bailey's testimony before Parliament's Treasury Committee scheduled at 14:30 GMT. Investors will pay close attention to Bailey's testimony to get cues about the BoE's monetary policy outlook.

In February's policy meeting, the BoE reduced its borrowing rates by 25 basis points (bps) to 4.5% but guided a 'cautious and gradual' interest rate cut approach. The BoE warned that inflationary pressures could accelerate in the third quarter of the year due to higher energy prices before returning to the 2% path.

Traders expect the BoE to follow a moderate policy-easing cycle amid fears of inflationary pressures remaining persistently higher and see the central bank cutting interest rates two times more this year. Fears of elevated price pressures are based on the assumption that business owners will pass on the impact of higher employment cost in the face of an increase in employers' contribution to National Insurance (NI) announced by Chancellor of the Exchequer Rachel Reeves in the Autumn Budget.

On the global front, market participants expect a nominal impact of United States (US) President Donald Trump's tariffs on the United Kingdom (UK) economy, given that Britain has a trade surplus against the US. Also, after meeting with UK Prime Minister Keir Starmer last week, Trump said that a trade deal could be made "pretty quickly" where tariffs "wouldn't be necessary".

Daily digest market movers: Pound Sterling outperforms US Dollar

• The Pound Sterling jumps to near 1.2850 against the US Dollar (USD) in European trading hours on Wednesday, the highest level seen since November 12. The GBP/USD pair extends its winning streak for the third trading day due to continuous underperformance from the US Dollar. The US Dollar Index (DXY), which tracks the Greenback's value against six major currencies, slumps to near 105.00.
• The US Dollar weakens as it loses its risk premium stemming from US President Trump's tariff agenda. On Tuesday, 25% tariffs on Canada and Mexico, and an additional 10% on China came into effect for pouring drugs into the US economy.
• Market experts believe Trump's tariffs could weaken households' overall spending, assuming that higher levies will be borne by US importers, who would pass on to end consumers. Such a scenario would diminish the purchasing power of individuals, forcing them to cut spending significantly.
• Meanwhile, escalating Federal Reserve (Fed) dovish bets have also contributed to weakness in the US Dollar. Fed dovish bets have swelled after a slew of weak US economic data. According to the CME FedWatch tool, the likelihood for the Fed to reduce interest rates in June has increased to 80% from 70% recorded a week ago.
• For more guidance on interest rates, investors will focus on the US Nonfarm Payrolls (NFP) data for February, which will be released on Friday. In Wednesday's session, market participants will pay attention to the US ADP Employment Change and the ISM Services PMI for February, which will be published during the North American session.

Technical Analysis: Pound Sterling jumps above 50% Fibo retracement

The Pound Sterling breaks above the 50% Fibonacci retracement level plotted from the late September high to mid-January low, around 1.2770. The long-term outlook of the GBP/USD pair has turned bullish as it climbs above the 200-day Exponential Moving Average (EMA), which is around 1.2680.

The 14-day Relative Strength Index (RSI) climbs above 60.00. A fresh bullish momentum would come into action if the RSI sustains above that level.

Looking down, the 38.2% Fibo retracement at 1.2608 will act as a key support zone for the pair. On the upside, the psychological 1.3000 level will act as a key resistance zone.