US Dollar Softens Ahead of Crucial Fed Announcement
The US dollar continued to lose ground on Wednesday, with both the pound and the euro gaining in strength. The GBP/USD pair edged closer to its highest levels in three years, while EUR/USD also made notable gains as traders positioned themselves ahead of the Federal Reserve’s much-anticipated policy announcement later this evening.
The Fed is widely expected to maintain interest rates within the current range of 4.25% to 4.50%, according to a Bloomberg poll of 94 analysts — all of whom forecast no change. Any deviation from this consensus would be considered highly unexpected.
Nevertheless, any indication that rate cuts may be on the horizon could put further downward pressure on the dollar. Recent remarks from Fed officials reflect a divided stance, with some concerned about inflation risks linked to tariffs, while others are increasingly wary of a weakening labour market.
The US Dollar Index slipped to its lowest level in a week overnight and now sits just 1.3% above the three-year low. The Fed’s decision is scheduled for 7:00pm BST, followed by a press conference with Chair Jerome Powell at 7:30pm.
Sterling Nears Key Levels as Trade Developments Emerge
Sterling’s gains also come amid signs of a potential breakthrough in trade relations. The Financial Times reports that the UK and US are close to finalising a deal that would ease tariffs on British steel and automotive exports by introducing more favourable thresholds.
This follows news of a trade agreement between the UK and India. Per the BBC, bilateral trade between the two nations reached £41 billion last year, and the British government anticipates this figure could grow by a further £25.5 billion annually by 2040 under the new deal.
Technically, GBP/USD is approaching resistance at its three-year high. Despite the possibility of a short-term pullback, the pair remains above key moving averages, suggesting any dips may be temporary and part of a broader upward trend. Provided the current momentum holds, a move towards 1.3559 could be on the cards.
However, a failure to find support at the 21-day EMA (1.3248) or the 50-day EMA (1.3069) may lead to a more prolonged correction.
EU Considers Retaliatory Tariffs Amid Trade Tensions
On the European front, trade tensions with the US may escalate. According to Bloomberg, the European Union is weighing retaliatory tariffs worth approximately €100 billion on American goods, should ongoing trade talks fail to produce a mutually acceptable outcome.
Sources suggest the European Commission will present a formal proposal to US officials this week. Member states are expected to receive notification of the proposed measures as early as Wednesday, with a month-long consultation period to follow before any final decisions are made.
Meanwhile, EUR/USD has climbed close to the upper boundary of its Bollinger Bands, suggesting overbought conditions may be developing. Key support for the pair remains at the 21-day EMA of 1.1278.
