The pound (GBP) strengthened near 1.2450 against the US dollar (USD) in the European session on Wednesday (29/1). The GBP/USD pair strengthened as the US dollar weakened as investors liquidated some risk-off trades built on concerns that China's affordable DeepSeek Artificial Intelligence (AI) models would challenge the dominance of top-tier chatbots, such as OpenAI and Meta, narrowing China's technological gap with the United States (US).

The US Dollar Index (DXY), which tracks the greenback against a basket of six major currencies, fell near 107.75. The greenback is also trading cautiously ahead of the Federal Reserve's (Fed) monetary policy decision, which will be announced at 19:00 GMT.

Traders are betting that the Fed will announce a pause in its current policy easing and keep interest rates unchanged in the range of 4.25%-4.50%, according to the CME FedWatch tool. In the last three policy meetings, the Fed has lowered its key lending rate by 100 basis points (bps).

Therefore, the Fed's guidance on how long it will keep borrowing costs at current levels will significantly influence the US dollar. In addition, investors will also be watching the Fed's views on US President Donald Trump's tariff plans and their impact on the outlook for monetary policy and inflation.

White House Press Secretary Karoline Leavitt said on Tuesday that the 25% tariffs on Canada and Mexico starting February 1 are "still on the table." Leavitt added that the President is "still considering a 10% tariff on China" starting Saturday.

This week, Trump also said he plans to impose tariffs on imports of pharmaceuticals, advanced chips and steel in an effort to boost domestic manufacturing. (AL)

Source: FXstreet