Pound Sterling trades with caution against US Dollar as Fed policy takes centre stage

• The Pound Sterling struggles around 1.3000 against the US Dollar ahead of the Fed's monetary policy decision, dot plot, and economic projections.
• Investors expect the Fed and BoE to keep interest rates steady this week.
• Market sentiment remains cautious as US President Trump is poised to impose reciprocal tariffs on April 2.

The Pound Sterling (GBP) struggles to extend the rally above the key level of 1.3000 against the US Dollar (USD) in European trading hours on Wednesday. The GBP/USD pair trades cautiously ahead of the Federal Reserve's (Fed) monetary policy decision at 18:00 GMT.

According to the CME FedWatch tool, the Fed is certain to keep interest rates unchanged in the range of 4.25%-4.50% for the second time in a row. Therefore, the major catalyst for the US Dollar will be the Fed's dot plot, which shows where policymakers see the Federal funds rate heading in the medium and longer term, and the Federal Open Market Committee's (FOMC) Summary of Economic Projections (SEP).

It would be interesting to know whether Fed officials will see easing inflationary pressures and declining consumer confidence in the current scenario or accelerating consumer inflation expectations due to United States (US) President Donald Trump's economic policies while forecasting the monetary policy outlook. In February, the annual core Consumer Price Index (CPI) - which excludes volatile food and energy prices - rose by 3.1%, the lowest level seen since April 2021.

According to analysts at Fitch, tariff shocks are estimated to "accelerate inflationary pressures by one point percent" in the near term. This scenario will discourage Fed officials from cutting interest rates before the last quarter of the year. Meanwhile, the CME FedWatch tool shows that the Fed will cut interest rates in the June meeting.

Daily digest market movers: Pound Sterling turns cautious ahead of UK employment, BoE policy

• The Pound Sterling trades with caution against its peers ahead of the United Kingdom (UK) labor market data for the three months ending January and the Bank of England's (BoE) monetary policy decision, scheduled for Thursday. Investors will pay close attention to the Average Earnings data, a key measure of wage growth that has contributed significantly to the high inflation in the services sector.
• UK's leading global provider of people data, analytics, and insight firm Brightmine showed on Tuesday that the pay growth has slowed as business owners are cautious before the implementation of an increase in payroll taxes from April. UK Chancellor of the Exchequer Rachel Reeves announced an increase in employers' contribution to National Insurance (NI) from 13.8% to 15% in the Autumn Budget. 
• Brightmine also said that a significant number of firms have planned a hiring freeze or team restructuring in response to the government's decision to increase employers' social security contributions, with some considering pay freezes and delays to increases, Reuters report. Meanwhile, economists expect Average Earnings (Excluding and Including) bonuses to have grown almost steadily by 5.9%.
• The BoE is expected to keep interest rates steady at 4.5%, with a 7-2 vote split. BoE Monetary Policy Committee (MPC) members Catherine Mann and Swati Dhingra are expected to support an interest rate cut, while the other seven policymakers will vote to keep rates unchanged. Investors will pay close attention to BoE Governor Andrew Bailey's commentary on the UK economic outlook amidst US President Trump's tariff policies.
• On Tuesday, US Treasury Secretary Scott Bessent confirmed in an interview with Fox Business that reciprocal tariffs would become effective on April 2. Bessent added that he is optimistic some of the tariffs may not have to go on because a deal can be "pre-negotiated" or that once countries receive their "reciprocal tariff number", they will come to us and want to "negotiate it down".

Technical Analysis: Pound Sterling sees upside above 1.3000

The Pound Sterling looks for a fresh trigger to extend its two-month rally above the key level of 1.3000 against the US Dollar on Wednesday. GBP/USD bulls take a breather as the 14-day Relative Strength Index (RSI) reached overbought levels above 70.00. However, this doesn't reflect that the bullish trend is over. The upside trend could resume once the momentum oscillator cools down to near 60.00.

Advancing 20-day and 50-day Exponential Moving Averages (EMAs) near 1.2830 and 1.2690, respectively, suggest that the overall trend is bullish.

Looking down, the 50% Fibo retracement at 1.2770 and the 38.2% Fibo retracement at 1.2614 will act as key support zones for the pair. On the upside, the October 15 high of 1.3100 will act as a key resistance zone.