GBP/USD clings to modest recovery gains near mid-1.3000s, lacks follow-through

• GBP/USD staged modest bounce from the fresh YTD low touched earlier this Monday.
• The risk-on impulse undermined the safe-haven USD and extended support to the pair.
• The uptick lacked bullish conviction amid the Ukraine crisis and ahead of the BoE/FOMC.

The GBP/USD pair held on to its modest recovery gains through the early North American session and was last seen trading just a few pips below the daily high, around mid-1.3000s.

Having defended the key 1.3000 psychological mark, the GBP/USD pair staged an intraday bounce from the lowest level since November 2020 touched earlier this Monday amid modest US dollar weakness. Hopes for a diplomatic solution to end the war in Ukraine lifted the global risk sentiment and undermined demand for traditional safe-haven assets, including the greenback.

The British pound drew additional support from expectations that the Bank of England will hike interest rates at its upcoming meeting on Thursday. The GBP/USD pair further benefitted from some cross-driven strength stemming from a sharp rise in the GBP/JPY cross. That said, the attempted recovery move lacked bullish conviction or strong follow-through buying.

The market optimism remained capped amid the risk of a further escalation in the Russia-Ukraine conflict. In fact, Russia attacked a large Ukrainian base near the border with NATO member Poland on Sunday. Adding to this, a Kremlin spokesperson said on Monday that all the plans of Russia in Ukraine will be fulfilled in full and in the time frames outlined.

Apart from this, elevated US Treasury bond yields acted as a tailwind for the USD and kept a lid on any meaningful upside for the GBP/USD pair. The recent monster gains in commodity prices have been fueling worries about a major inflationary shock, which reaffirmed bets for an imminent start of the policy tightening by the Fed and pushed the US bond yields higher.

Investors also seemed reluctant to place aggressive bets ahead of the key central bank event risks - the outcome of a two-day FOMC meeting on Wednesday and the BoE policy decision on Thursday. In the meantime, traders will take cues from fresh developments surrounding the Russia-Ukraine saga, the USD price dynamics and Tuesday's release of the UK employment details.

Technical levels to watch