The British pound against the US dollar edged lower during Tuesday’s Asian session, despite opening with a bullish gap. The pair is currently trading near 1.3290, having given back its initial gains. Markets remain cautious ahead of the Federal Reserve’s policy meeting, with the US Dollar Index finding support, which puts pressure on the sterling.

The market's primary focus is on the upcoming Federal Reserve interest rate decision. According to market pricing tools, investors remain deeply divided over a potential rate hike in July, with the current probability sitting at nearly 38%. This level of uncertainty is unusual so close to a policy meeting, reflecting significant ambiguity regarding the trajectory of US inflation and future policy direction. Some institutions believe the Fed may hike to strengthen its anti-inflation messaging.

Market analysts suggest that if the Fed chooses to raise rates, it could further cement expectations of tighter US monetary policy and boost the dollar's appeal. Meanwhile, expectations for at least a 25-basis-point rate hike in September remain high, hovering around 81%. This rising expectation of a Fed hike is a core factor underpinning the dollar's recent resilience and is capping further upside for GBP/USD.

The US dollar has been relatively stable recently, even as tensions in the Middle East show signs of easing. The US has stated it is using communication channels to de-escalate the situation, reporting positive progress in discussions. Concurrently, a pause in US military operations after 13 consecutive nights has improved market risk sentiment, driving international oil prices lower.

A decline in oil prices has a direct impact on global inflation expectations. Lower energy costs could reduce future price pressures and diminish the need for central banks to continue tightening monetary policy. However, the situation remains uncertain, with markets viewing the current changes as a temporary de-escalation rather than a complete removal of risk.

On the UK front, the pound's recent performance has been influenced by falling gilt yields. The yield on the UK 10-year government bond has dropped to around 4.97%, primarily driven by lower energy prices and easing inflation pressures. As oil retreats from recent highs, market expectations for further rate hikes by the Bank of England have decreased, putting short-term pressure on sterling.

The BoE policy meeting is a key event for the pound's future direction. The market widely expects the BoE to hold its interest rate steady at 3.75% this week. Recent data showed UK consumer price inflation slowed to 2.6% in June, its lowest level in 15 months and below the BoE's own forecast. This rapid decline in inflation has reduced pressure on the BoE to tighten policy further, but it has also weakened a key support for the pound that came from higher interest rates.

The GBP/USD market is currently in a tug-of-war between expectations of US policy and improving UK inflation figures. If the Fed delivers a more hawkish signal, the dollar could continue to gain support, and the pound might weaken further. Conversely, if the Fed remains cautious and UK economic data continues to improve, the pound still has room for a rebound.

In the global forex market, the US dollar has recently seen renewed inflows, closely correlated with rising US rate expectations. The pound’s earlier rally was primarily supported by the high-interest-rate environment from the BoE, but this advantage is gradually fading as inflation falls. Investors are now watching not just changes in interest rate differentials, but also future economic growth performance and central bank policy paths.

On the daily chart, GBP/USD has maintained a generally bullish but slowing momentum. The pair is currently trading around 1.3290. Immediate resistance is seen at the 1.3350 area; a break above here could open the door to the 1.3400 handle. On the downside, support is at 1.3250. A break below this level could open the path for a decline towards the 1.3150 region. Technical structure suggests the prior uptrend is not entirely broken, but the dollar's rebound is limiting price advances, and market momentum is entering a phase of rebalancing.

On the 4-hour chart, GBP/USD shows a short-term pattern of high-level consolidation and a pullback. The failure to extend gains after the gap-up open indicates weakening buying pressure. In the near term, support at 1.3290 is crucial. If the price can stabilise here and break back above the 1.3320 area, a recovery in the uptrend could begin. However, a break below current support could lead to a test of the 1.3250 area. Short-term momentum indicators are declining, and the market is awaiting the Fed's decision and the BoE's policy signals for new directional cues.

Summary

The current trajectory of GBP/USD is primarily influenced by two factors: expectations of Fed policy and changes in UK inflation. The dollar is supported by market bets that the Fed may keep rates higher, while falling UK inflation reduces the likelihood of further tightening by the BoE, putting short-term pressure on the pound. The future direction of the pair will depend on whether the Fed delivers a more hawkish signal and how the BoE assesses its policy room following the drop in inflation. If US rate expectations continue to rise, GBP/USD could face further adjustments. However, if the Fed remains cautious and UK economic data continues to improve, the pound could regain market attention. In the near term, the 1.3250–1.3350 area will be a key battleground for bulls and bears.