- GBP/USD gained some positive traction on Monday amid the emergence of some USD selling.
- The recent slide in the US bond yields, stable risk sentiment undermined the safe-haven buck.
- The fundamental backdrop warrants some caution before placing bullish bets around the pair.
The GBP/USD pair showed resilience below the 1.2200 round-figure mark and attracted some buying on the first day of a new week. The pair held on to its modest gains through the early European session and was last seen trading just below mid-1.2200s.
A combination of factors failed to assist the US dollar to capitalize on the previous session's strong move up, instead prompted some selling on Monday, which, in turn, extended support to the GBP/USD pair. The Fed's so-called dot plot showed that the median projection for the federal funds rate stood at 3.4% for 2022 and 3.8% in 2023. Investors, however, took comfort from the fact that policymakers forecasted the rate to decline to 3.4% in 2024 and 2.5% over the long run. This led to the recent sharp pullback in the US Treasury bond yields. Apart from this, signs of stability in the financial markets further undermined the safe-haven greenback.
That said, market participants seem convinced that the Fed would tighten its monetary policy at a faster pace to combat stubbornly high inflation, which shot to over a four-decade high in May. Adding to this, concerns that a more aggressive move by major central banks would pose challenges to global economic growth should further help limit the downside for the buck. Furthermore, expectations that the Bank of England would opt for a more gradual approach to raising interest rates could act as a headwind for the British pound. This, along with the UK-EU impasse over the Northern Ireland Protocol of the Brexit agreement, should cap gains for the GBP/USD pair.
There isn't any relevant economic data due for release from the UK on Monday and the US markets will be closed in observance of Juneteenth National Independence Day. This might further hold back traders from placing aggressive bullish bets around the GBP/USD pair. Hence, it will be prudent to wait for strong follow-through buying before traders start positioning for an extension of the recent bounce from the YTD low touched last week. That said, a scheduled speech by St. Louis Fed President James Bullard might influence the USD price dynamics and provide some impetus to the GBP/USD pair later during the early North American session.