Pound Sterling declines against the US Dollar as Trump’s tax agenda gains momentum

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16:37 - 26/02/2025

The Pound Sterling drops to around 1.2640 against the US Dollar as the Greenback strengthens amid a rebound in US bond yields.
US Treasury yields rise after the US administration approves a $4.5 trillion tax cut plan.
BoE’s Dhingra anticipates more than four interest rate cuts this year.

The Pound Sterling (GBP) dips to around 1.2640 against the US Dollar (USD) during Wednesday’s European session, facing selling pressure as the US Dollar Index (DXY) rebounds sharply from an 11-week low of 106.10 earlier in the day.

The Greenback strengthens as US Treasury yields recover after a five-day decline, with 10-year yields rising to approximately 4.33% after touching a more than two-month low of 4.28% during the Asian session.

US bond yields gain traction after the Republican-controlled House of Representatives advances a $4.5 trillion tax cut plan, which also includes funding for migrant deportations, border security, energy deregulation, and military spending, according to Reuters. This liquidity injection could heighten inflationary pressures, potentially prompting the Federal Reserve (Fed) to maintain interest rates at current levels for an extended period.

Meanwhile, Fed dovish bets have increased following weak US flash S&P Global PMI data for February, which showed the first contraction in the service sector in over two years. According to the CME FedWatch Tool, the probability of a Fed rate cut in June has risen to 65% from 47% a week ago. The Fed is widely expected to keep rates steady at 4.25%-4.50% in its March and May policy meetings.

Looking ahead, investors will monitor US Durable Goods Orders on Thursday and the Personal Consumption Expenditures (PCE) Price Index on Friday. The PCE inflation data, in particular, will be closely watched as it could shape market expectations for the Fed’s monetary policy outlook.

Daily Digest Market Movers: Pound Sterling Holds Steady Amid BoE Dovish Signals

The Pound Sterling trades sideways against its major peers on Wednesday as investors assess dovish remarks from Bank of England (BoE) Monetary Policy Committee (MPC) member Swati Dhingra. Speaking at Birkbeck on Monday, Dhingra highlighted “weakness in consumption” and signaled support for unwinding monetary policy restrictions.
Markets have fully priced in two BoE rate cuts this year, while Dhingra advocates for more than four. She noted, “Gradual has been interpreted as 25 basis points per quarter, but cutting rates at this pace for the rest of 2025 would still leave monetary policy overly restrictive.”
Earlier this month, the BoE cut interest rates by 25 basis points to 4.5% and signaled a gradual easing path. The central bank also halved its GDP growth forecast for 2025 to 0.75%, warning that inflationary pressures could rise in Q3 due to higher energy costs.
The UK economic outlook remains uncertain amid potential US tariffs under President Donald Trump. So far, Trump has imposed 10% tariffs on China and 25% on steel and aluminum imports, while threatening reciprocal tariffs and 25% levies on Canadian and Mexican imports, as well as foreign cars, semiconductors, pharmaceuticals, and forest products.