The pound showed muted performance against the dollar in early European trading, hovering around the $1.2700 mark. A rise in the greenback, driven by lower expectations of an aggressive interest rate cut in the US and mounting concerns over president-elect Donald Trump’s proposed tariffs, limited any significant gains for sterling. This situation further strengthened the dollar's strength as traders factored in the potential impact of Trump's protectionist policies on global trade. As a result, the pound struggled to find momentum in this environment.

Bank of England's Role

Governor of the Bank of England Andrew Bailey is scheduled to deliver a speech later in the day. Traders are keenly listening for any signals regarding the Bank's stance on interest rates, especially with the next policy meeting just a few weeks away. Any indication of tightening or dovishness could provide fresh direction for sterling. Matthew Ryan, head of market strategy at Ebury said: “The pound has staged a decent recovery against the dollar in the past week, ending London trading on Tuesday just below the 1.27 level. The view that the UK economy is unlikely to be heavily impacted by Trump’s tariffs appears to be providing sterling with at least a modicum of support. The domestic outlook is far from devoid of risk, however, and Tuesday’s report from the British Retail Consortium, which showed that like-for-like retail sales sank by 3.4% YoY in November, provides reason for caution.”

Impact on Sterling

The pound's performance is closely tied to various factors. The uncertainty surrounding interest rates and the potential impact of different policies play a crucial role. Traders are constantly analyzing these factors to make informed decisions. The upcoming speech by Andrew Bailey holds significant importance as it could sway the market sentiment and provide clarity on the Bank's future actions.

Political Uncertainty in France

Meanwhile, sterling pushed higher against the euro (GBPEUR=X) as political uncertainty in France weighed on the single currency. Sterling advanced as concerns over the stability of the French government took centre stage. A no-confidence vote against prime minister Michel Barnier is set to take place later on Wednesday, raising fears of a potential political crisis in the eurozone's second-largest economy. This political uncertainty has a direct impact on the value of the euro and indirectly affects the pound.

Gold Prices and South Korea

Gold prices faced challenges in gaining traction during early European trade on Wednesday, despite a brief rally overnight triggered by political unrest in South Korea. The precious metal's gains were largely subdued as traders remained cautious, awaiting key signals on US interest rates. Spot gold was muted at $2,641.90 per ounce, while US gold futures slipped 0.2% to $2,663.80 at the time of writing. “​Buyers are once again attempting to revive the rally here, having managed to lift the spot gold price off last week’s low and avoid any further push to the downside,” Chris Beauchamp, chief market analyst at IG, said. He added that further upside could target the 25 November high of $2,720, with a potential push towards the record high set in late October. However, he cautioned that in the event of a pullback, gold could revisit support levels around $2,600, with a deeper decline bringing it closer to the $2,550 mark, where a significant correction was halted last month.

Middle East Tensions and Oil Prices

Oil prices climbed on Wednesday as concerns over escalating Middle East tensions and the prospect of prolonged supply cuts by OPEC+ fuelled market uncertainty. Brent crude futures rose 0.2%, trading at $73.80 per barrel, while US West Texas Intermediate (WTI) (CL=F) climbed 0.1% to $70.01 per barrel at the time of writing. The latest uptick in oil prices comes as Israel’s military actions in Lebanon continue despite a cease-fire agreement. Lebanese prime minister Najib Mikati confirmed on Tuesday that diplomatic efforts are underway to address Israeli violations of the truce, with hopes to secure Israel’s withdrawal from border towns. However, Israeli defence minister Israel Katz warned that Israel would target Lebanese state infrastructure if the cease-fire collapsed, further stoking fears of regional instability. Further compounding market concerns is the looming decision from the Organisation of Petroleum Exporting Countries (OPEC) and its allies — collectively known as OPEC+. The group is set to meet on Thursday to discuss its production policy for the first quarter of 2025, with many analysts expecting OPEC+ to extend its current supply cuts through at least the end of March. This move would aim to support oil prices amid weaker-than-expected global demand.

Broad Market Movements

In broader market movements, the FTSE 100 (^FTSE) opened lower, slipping 0.2% to 8,346.83 points. For more details check our live coverage here. Download the Yahoo Finance app, available for Apple and Android.