GBP/USD remains on the defensive near mid-1.3100s amid modest USD strength

• GBP/USD witnessed some selling on the first day of a new week amid modest USD strength.
• The cautious market mood and the Fed’s hawkish outlook acted as a tailwind for the buck.
• A dovish assessment of the BoE decision undermined the GBP and contributed to the downtick.

The GBP/USD pair remained on the defensive through the early European session and was last seen trading just a few pips above the daily low, around the 1.3160-1.3155 region.

The pair struggled to capitalize on Friday's goodish rebound from the vicinity of the 1.3100 mark and edged lower on the first day of a new week amid modest US dollar strength. Despite hopes for a peace deal to end the war in Ukraine, investors remain concerned amid the heavy aerial bombardment in the capital city Kyiv by Russian forces. This was evident from the prevalent cautious market mood, which, in turn, benefitted the greenback's safe-haven status and weighed on the GBP/USD pair.

Moreover, the Fed's hawkish outlook, indicating that it could raise rates at all the six remaining meetings in 2022, acted as a tailwind for the buck. Adding to this, influential FOMC memebers said on Friday that the US central bank needs to adopt a more aggressive policy stance to combat stubbornly high inflation. This helped the yield on the benchmark 10-year US government bond to hold steady just below the highest level since June 2019, which further underpinned the greenback.

On the other hand, the British pound was pressured by a dovish assessment of the Bank of England's policy decision last week. In fact, the BoE raised its key rate for the third successive meeting, though the 25 bps rate hike disappointed investors anticipated a more aggressive increase. Moreover, the UK central bank also softened its language around the need for future rate hikes.

The fundamental backdrop, along with the post-BoE price action, suggests that the path of least resistance for the GBP/USD pair is to the downside. That said, the lack of any follow-through selling warrants some caution for aggressive bearish traders and positioning for any meaningful downside. In the absence of any major market-moving economic releases, traders on Monday will take cues from a scheduled speech by Fed Chair Jerome Powell, due later during the US session.

Technical levels to watch