• The Pound Sterling weakens against the US Dollar amid central bank caution.
• Investors expect both the Fed and the BoE to hold rates steady.
• Energy and geopolitical uncertainties continue to fuel inflation concerns.

GBP/USD trades lower on Tuesday, hovering around 1.3490 at the time of writing, down 0.33% on the day as investors trim positions ahead of key monetary policy decisions from the Federal Reserve (Fed) and the Bank of England (BoE) later this week.

The Pound Sterling (GBP) faces selling pressure amid uncertainty surrounding the BoE policy outlook. The central bank is widely expected to keep its key rate unchanged at 3.75%, with a large majority in favor, as recent UK core inflation data has shown signs of easing. However, policymakers are still likely to highlight upside risks to inflation, particularly due to persistent tensions in global energy markets.

BoE Governor Andrew Bailey recently stated at an International Monetary Fund (IMF) event that there is no urgency to adjust monetary policy, emphasizing the high level of uncertainty surrounding the economic outlook and the transmission of energy shocks to the UK economy.

On the US side, the US Dollar (USD) remains relatively supported, with the US Dollar Index (DXY) edging higher as markets await the Fed decision. The central bank is expected to leave interest rates unchanged in the 3.5%-3.75% range for the fourth consecutive meeting.

According to Deutsche Bank, market expectations for US monetary policy have recently shifted in a more hawkish direction, driven by persistent inflationary pressures linked to rising energy prices. In this context, any hawkish signals from Fed Chair Jerome Powell could further support the Greenback and increase downside pressure on the pair.

Meanwhile, the geopolitical backdrop remains a key driver for markets. Ongoing tensions in the Middle East and disruptions to energy supply continue to weigh on risk sentiment, supporting the US Dollar as a relative safe-haven asset.

In the near term, investors are likely to remain cautious, with volatility expected to increase ahead of the central bank announcements, as markets closely watch forward guidance for clues on the future path of interest rates.