The pound (GBP) weakened against the US dollar (USD) in London on Wednesday (22/1) but held on to Tuesday's gains above the key support level of 1.2300. The GBP/USD pair weakened slightly as the US dollar recovered slightly, with the US Dollar Index (DXY), which tracks the greenback against a basket of six major currencies, edging higher from a two-week low of 107.90.

However, the greenback could face selling pressure as its safe-haven demand has waned. The safe-haven appeal of the USD has waned as the tariff plans unveiled by the US administration of President Donald Trump were not as daunting as investors had anticipated during the election campaign. Trump said on Tuesday that he would impose 10% tariffs on China on February 1, the same day he promised to impose 25% tariffs on the rest of the North American economy. During the election campaign, Trump threatened to impose 60% tariffs on China.

Market experts believe that the tariffs will be implemented in a more balanced manner, so the risk premium on the US dollar has been reduced. The cautious approach to tariffs will also reduce the risk of continued inflationary increases, weighing on strong expectations that the Federal Reserve (Fed) will keep interest rates at current levels for a longer period.

According to the CME FedWatch tool, traders believe that the Fed will keep its main lending rate in the range of 4.25%-4.50% in the next three policy meetings. (AL)

Source: FXstreet