The GBP/USD currency pair regained positive traction on Monday, buoyed by selling pressure on the US Dollar (USD). This movement was underpinned by expectations that the Bank of England (BoE) will adopt a less aggressive policy stance regarding interest rate cuts. The pair's recent uptrend, which saw it recover from levels below 1.2100 earlier this year, experienced a slight stall from positions beyond the 1.2700 mark. However, it found support as it moved back above the 1.2600 round figure.
The British Pound's (GBP) relative outperformance is largely attributed to the anticipated cautious approach by the BoE, which contrasts with the broader market sentiment surrounding the Federal Reserve's interest rate decisions. The Nonfarm Payrolls (NFP) data, set to be released on Friday, is expected to play a critical role in shaping expectations about the Fed's rate-cut trajectory and subsequently influencing USD demand. Market participants are likely to keep a close eye on these employment details for further clues.
Meanwhile, signs that the disinflationary process in the US has stalled may reinforce the Fed's inclination towards a wait-and-see approach regarding future interest rate adjustments. This potential for an extended pause in rate changes by the Fed could limit USD losses and cap gains for the GBP/USD pair. Additionally, geopolitical risks and ongoing conflicts, such as those between Russia and Ukraine, continue to support safe-haven assets like gold and may influence market dynamics.
The USD Index (DXY) began the week on a weaker note, reversing much of Friday's gains that had pushed it to over a one-week high. Despite the reduced strength of the USD, concerns about economic uncertainties, including US President Donald Trump's reciprocal tariffs and their potential impact on the UK economy, might deter GBP bulls from committing to fresh long positions.
Traders will also focus on the release of the US February ISM Manufacturing Purchasing Managers Index later on Monday. This data will provide additional insights into the health of the US manufacturing sector and could inform trading strategies moving forward.