GBP/USD strengthened to around 1.3480 at the start of Friday's Asian session, holding above 1.3450. This strengthening occurred as the US dollar weakened again, as markets became increasingly confident that the possibility of a Fed interest rate cut remains open this year.

Dollar sentiment was also pressured as investors saw the potential for further USD weakness if the next Fed chairman was more dovish and pushed for deeper interest rate cuts. Market expectations regarding this policy direction have reduced the dollar's appeal against other major currencies, including the pound sterling.

From the UK side, the Bank of England (BoE) supported the pound by opting for a more gradual policy path. At its December meeting, the BoE lowered interest rates from 4.0% to 3.75%, the lowest level in nearly three years, but emphasized that subsequent cuts would be more carefully calculated.

Bank of England Governor Andrew Bailey also emphasized that interest rates are likely to continue to fall, but any subsequent cuts will be a "more difficult" decision as the central bank continues to weigh inflation risks and economic resilience.

This difference in policy rhythm is important: if the Fed cuts rates more aggressively while the Bank of England is more cautious, the yield differential could further favor the pound. This situation typically helps GBP/USD maintain its strength.

Looking ahead, GBP/USD movements remain sensitive to comments from central bank officials and US economic data. If the Fed's rate cut signal strengthens, the pound has a chance to maintain momentum; conversely, if the dollar suddenly receives support from strong data or a more hawkish Fed tone, the pair could quickly reverse.

5 key points

- GBP/USD rose to around 1.3480 and held above 1.3450.

- The dollar weakened as markets became more confident the Fed would cut rates.

- Expectations of a new, more dovish Fed chairman could add pressure on the USD.

- The Bank of England lowered rates to 3.75%, but emphasized that the path would be gradual.

- The Fed's policy divergence with the Bank of England (BoE) is key to the future direction of GBP/USD.

Source: Newsmaker.id