The British Pound (GBP) extends its advance against the US Dollar (USD) on Tuesday, with GBP/USD climbing to fresh six-month highs amid broad-based weakness in the Greenback. At the time of writing, the pair is trading around 1.3739, up nearly 0.42% on the day.
The US Dollar remains under sustained selling pressure as renewed tariff threats from US President Donald Trump and growing political interference with the Federal Reserve’s independence revive concerns about policy credibility, fueling fresh “de-dollarization” chatter.
US President Donald Trump said on Monday he plans to raise tariffs on South Korean imports to 25% from 15%, blaming South Korea’s legislature for failing to approve a trade deal reached last year. The move followed a fresh escalation over the weekend, when Trump warned he could impose sweeping 100% tariffs on all Canadian goods if Ottawa moves ahead with a trade agreement with China.
As confidence in the US policy outlook deteriorates, investors are increasingly rotating out of the Dollar and into other G10 currencies. The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, is trading near four-month lows around 96.61.
Political risks in Washington are adding another layer of pressure on the Greenback, with the prospect of a fresh US government shutdown back in focus. Lawmakers face a January 30 funding deadline after Democratic leaders threatened to block a $1.2 trillion spending package over disagreements surrounding funding for the Department of Homeland Security and immigration enforcement.
Attention now turns squarely to the Federal Reserve’s interest rate decision due on Wednesday. Markets widely expect the central bank to keep rates unchanged in the 3.50%-3.75% range. Traders will closely parse Chair Jerome Powell’s comments for any signals on the future policy path.
Hints of a gradual easing bias would likely weigh further on the US Dollar, while a more cautious or hawkish tone could offer the Greenback some near-term support.
Meanwhile, recent UK data have reinforced the view that the Bank of England (BoE) can afford to remain patient before cutting rates again, offering underlying support to Sterling.
A Reuters poll conducted between January 21-26 showed that 54 of 56 economists expect the BoE to hold the Bank Rate at its February 5 meeting, in line with market pricing. Only about 55% of respondents see a rate cut by the end of March, while the rest expect rates to remain unchanged through the first quarter.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
Source: https://www.fxstreet.com/news/gbp-usd-climbs-to-six-month-highs-amid-sustained-us-dollar-selling-202601271318
