GBP/USD Outlook: 1.2400 confluence holds the key for bulls amid the post-NFP USD strength

• A modest USD strength drags GBP/USD lower for the second successive day on Monday.
• Bets for a 25 bps Fed lift-off in June push the US bond yields higher and underpin the USD.
• The risk-on mood might cap gains for the safe-haven buck and help limit losses for the pair.

The GBP/USD pair kicks off the new week on a softer note and extends its retracement slide from mid-1.2500s, or the highest level since May 16, touched on Friday. The US Dollar (USD) gained positive traction for the second day amid the uncertainty over the Federal Reserve's (Fed) next policy move. It turns out to be a key factor exerting some pressure on the major. It is worth recalling that a slew of influential Fed officials last week backed the case for skipping an interest rate hike, though the markets are still pricing in the possibility of another 25 bps lift-off in June. Moreover, investors now seem to have pushed back expectations for an imminent pause in the Fed's rate hiking campaign to July and eased off on bets for rate cuts later in the year following the release of the US monthly employment details on Friday.

The headline NFP print showed that the US economy added 339K jobs in May, well above the 294K in the previous month and smashing consensus estimates for a reading of 190K. Additional details, however, revealed that the Unemployment Rate rose to 3.7% compared to an expected uptick to 3.5% from 3.4% in April. Furthermore, Average Hourly Earnings edged lower to 4.3% from 4.4%, indicating signs of moderating wage growth. Nevertheless, the data was strong enough to support prospects for further policy tightening by the Fed, pushing the US Treasury bond yields higher and underpinning the Greenback. The prevalent risk-on environment - as depicted by a generally upbeat tone around the equity markets - seems to cap the safe-haven buck and might lend support to the GBP/USD pair.

The market sentiment remains well supported by the passage of legislation to lift the government's $31.4 trillion debt ceiling to avert an unprecedented American default. A private-sector survey showed on Monday that China's services activity picked up in May and boosted investors' confidence. Apart from this, firming expectations for additional interest rate hikes by the Bank of England (BoE), bolstered by stronger-than-expected UK consumer inflation figures for May, might contribute to limiting losses for the GBP/USD pair, at least for now. This makes it prudent to wait for solid follow-through selling before positioning for any significant downside for spot prices. Traders now look to the final UK Services PMI release for a fresh impetus ahead of the US ISM Services PMI, due later during the early North American session.

Technical Outlook

From a technical perspective, the recent bounce from the 1.2300 neighbourhood faltered near the 61.8% Fibonacci retracement level of the downfall witnessed in May. The subsequent slide and acceptance below the 38.2% Fibo. level supports prospects for a decline towards 1.2300 confluence support, comprising the 23.6% Fibo. level and the 50-period Simple Moving Average (SMA) on the 4-hour chart. The handle should now act as a pivotal point, which, if broken decisively, will shift the bias back in favour of bearish traders and make the GBP/USD pair vulnerable to retesting last week's swing low, around the 1.2300 mark.

On the flip side, momentum is back above 38.2% Fibo. level, around the 1.2450-1.2455 region, might now confront resistance near the 1.2500 psychological mark, representing 50% Fibo. level. This is followed by 61.8% Fibo. level, around the 1.2535-1.2540 zone, above which the GBP/USD pair might aim to reclaim the 1.2600 round figure. The momentum could extend further towards the 1.2625-1.2630 intermediate hurdle en route to the YTD peak, around the 1.2680 region.