GBP/USD strengthens beyond mid-1.2000s, hits fresh multi-week high amid weaker USD

• GBP/USD jumped to a fresh multi-week high amid the emergence of fresh USD selling.
• A positive intraday turnaround in the risk sentiment weighed on the safe-haven buck.
• Brexit woes might cap gains for the British pound ahead of the crucial FOMC decision.

The GBP/USD pair attracted some dip-buying near the 1.1960 area on Monday and shot to a nearly three-week peak during the mid-European session. The pair was last seen trading around the 1.2065-1.2070 region, up over 0.50% for the day.

Friday's better-than-expected flash UK PMI prints reaffirmed market bets for a 50 bps rate hike by the Bank of England in August and continued acting as a tailwind for the British pound. On the other hand, a positive turnaround in the global risk sentiment - as depicted by a strong intraday rally in the equity markets - weighed on the safe-haven US dollar. In fact, the USD Index languished near its lowest level since July 5 touched on Friday, which, in turn, was seen as another factor that provided a goodish lift to the GBP/USD pair.

That said, growing concerns about a global economic downturn could keep a lid on any optimistic move in the markets. Apart from this, a goodish rebound in the US Treasury bond yields could offer support to the safe-haven greenback. Investors also remain worried that the UK government's controversial Northern Ireland Protocol Bill could trigger a trade war with the European Union amid the ongoing cost-of-living crisis. This could act as a headwind for sterling and further contribute to capping any meaningful upside for the GBP/USD pair.

Investors might also be reluctant to place directional bets and prefer to wait for the outcome of the crucial FOMC monetary policy meeting on Wednesday. The Fed is widely expected to hike interest rates by 75 bps, though recession fears could force the US central bank to slow the pace of its aggressive policy tightening path. This, in turn, suggests that the Fed's policy outlook would now play a key role in influencing the USD price dynamics and help investors to determine the near-term trajectory for the GBP/USD pair.

In the meantime, the broader market risk sentiment and the US bond yields would drive the USD demand amid absent relevant market moving economic releases from the US on Monday. Hence, it remains to be seen if the GBP/USD pair is able to capitalize on the positive move or meets with a fresh supply at higher levels. Nevertheless, acceptance above the 1.2045 horizontal resistance could be seen as a trigger for intraday traders and might have already set the stage for a further near-term appreciating move.

Technical levels to watch