GBP/USD recovers but flat-lining below 1.2600 mark

The GBP/USD pair has recovered its modest intraday losses and was last seen trading in neutral territory, around the 1.2575-1.2580 region during the early European session.

The pair struggled to capitalize on Friday's strong recovery move from its lowest level since July 2020 and edged lower on the first day of a new week amid the emergence of fresh US dollar buying. The prospects for a more aggressive policy tightening by the Fed assisted the greenback to regain positive traction and inch back closer to the multi-year peak touched last week.

In fact, the markets expect the US central bank to hike interest rates at a faster pace and ultimately lift the benchmark rates to around 3.0% by the end of the year to combat stubbornly high inflation. This was reinforced by elevated US Treasury bond yields, which, in turn, continued acting as a tailwind for the greenback and exerted some downward pressure on the GBP/USD pair.

On the other hand, the British pound was undermined by signs that the UK economy is under stress from the soaring cost of living. Weak UK Retail Sales figures released last month highlighted that high inflation might have already started taking its toll on consumer spending. This forced investors to scale back expectations for any further rate hikes from the Bank of England.

Despite these negative factors, downside remains cushioned as investors seem reluctant to place aggressive bets ahead of this week's key central bank event risks. The Fed is scheduled to announce its decision at the end of a two-day policy meeting on Wednesday and is anticipated to hike rates by 50 bps. This will be followed by the BoE policy update on Thursday.

Apart from this, important macro data scheduled at the beginning of a new month, including the closely watched US monthly jobs report, or NFP, on Friday will help determine the near-term trajectory. In the meantime, traders will take cues from the US ISM Manufacturing PMI, which might influence the USD and provide some impetus to the GBP/USD pair later during the North American session.

Technical levels to watch