The Pound Sterling (GBP) has fallen to approximately 1.2660 against the USD during North American trading hours. The US Dollar Index (DXY) has rebounded after reaching a near 11-week low earlier in the day.

US Treasury yields are recovering, with 10-year yields climbing to 4.33% after briefly hitting a two-month low. This recovery follows the House advancing a $4.5 trillion tax cut plan, which may increase inflationary pressures and impact the Federal Reserve’s interest rate decisions.

Traders are adjusting their expectations regarding Fed rate cuts after disappointing service sector activity was reported. The likelihood of a rate cut in June has risen to 65%, while the Fed is expected to maintain current borrowing rates at 4.25%-4.50% in upcoming meetings.

Upcoming data releases on US Durable Goods Orders and the Personal Consumption Expenditures Price Index (PCE) will be closely monitored for insights into US monetary policy. PCE inflation data is particularly significant in assessing future Fed actions.

The GBP shows strength against most currencies except the USD. Comments from a Bank of England (BoE) member suggested a preference for more significant interest rate cuts than previously anticipated, with the BoE having already reduced rates to 4.5%.

Uncertainty surrounds the UK economy, partly due to potential tariffs from the US. The GBP has dropped to around 1.2640 against the USD, maintaining pressure around the 200-day Exponential Moving Average.

Key support for GBP/USD is at the February 11 low of 1.2333, while resistance levels are identified at 1.2767 and 1.2927. The Core Personal Consumption Expenditures Price Index, a crucial inflation measure, will be released on February 28, 2025, with expectations set at a 2.6% increase.

The recent fall of the Pound Sterling to around 1.2660 against the US dollar highlights continued volatility in the FX markets. The rebound of the US Dollar Index, making up for its earlier slump to an 11-week low, further underscores how quickly market sentiment can shift.

Meanwhile, US Treasury yields are making their way back up, with the 10-year yield reaching 4.33% after briefly dipping to a two-month low. The movement in yields follows legislative progress on a $4.5 trillion tax cut plan, which could put further upward pressure on inflation. This, in turn, complicates the Federal Reserve’s position on interest rate policy. If inflation expectations continue to rise, rate cuts may be delayed, affecting dollar strength and wider market dynamics.

Traders have adjusted their outlook on when the Fed may start lowering rates. With weaker-than-expected service sector data, the probability of a rate cut in June has gone up to 65%, but for now, rates are projected to stay at 4.25%-4.50%. We need to keep an eye on upcoming US economic reports, particularly Durable Goods Orders and the Personal Consumption Expenditures Price Index. The latter is especially relevant since the Fed relies heavily on it when determining future policy decisions.

Sterling is showing resilience against various other currencies, with the exception of the US dollar. Remarks from one of the Bank of England’s policymakers suggest a preference for larger rate reductions than the market had previously priced in. Given the BoE has already lowered rates to 4.5%, any further cuts could weigh on the pound, particularly against the greenback. Separately, uncertainty over possible US tariffs on British goods further clouds the outlook, adding another layer of pressure on Sterling.

As it stands, GBP/USD remains around 1.2640, hovering near the 200-day Exponential Moving Average. Important support sits at the February 11 low of 1.2333, while resistance levels at 1.2767 and 1.2927 could set the next key hurdles. With the Core Personal Consumption Expenditures Price Index scheduled for release on 28 February 2025, and expectations centring on a 2.6% increase, the market will have another vital gauge of inflation to digest.

In the coming weeks, traders in FX and derivatives markets need to account for how these developments shape future price action. Sharp swings in rate expectations and inflation data can create quick and decisive moves, meaning being prepared for sudden shifts in sentiment is just as important as the longer-term outlook.