GBP/USD drops to fresh daily low amid stronger USD, holds above 1.2500 mark

• GBP/USD retreats from a multi-month high touched on Friday amid a modest USD strength.
• The fundamental backdrop warrants some caution before positioning for any further losses.
• Investors now look to the US ISM PMI for some impetus ahead of the FOMC on Wednesday.

The GBP/USD pair comes under some selling pressure on the first day of a new week and erodes a part of Friday's strong gains to the 1.2580-1.2585 region, or its highest level since June 2022. Spot prices extend the steady intraday descent through the early part of the European session and drop to a fresh daily low, around the 1.2520 area in the last hour.

A combination of supporting factors assists the US Dollar (USD) to gain positive traction for the third successive day, which, in turn, is seen dragging the GBP/USD pair lower. The prospects of the Federal Reserve (Fed) raising interest rates by another 25 basis points (bps) at the end of a two-day meeting on Wednesday, along with looming recession risks, continue to act as a tailwind for the safe-haven Greenback.

China's official Manufacturing PMI declined to 49.2 in April from 51.9 in March. This comes on the back of the Advance US  GDP report released last week, which showed that growth in the world's largest economy decelerated more than expected during the first quarter. This, in turn, adds to worries about economic headwinds stemming from rising borrowing costs and drives some haven flows towards the buck.

The markets, however, seem convinced that the US central bank will then hold rates steady for the rest of the year beyond May, which might hold back the USD bulls from placing aggressive bets. Apart from this, rising bets for a 25 bps lift-off by the Bank of England (BoE) might further contribute towards limiting the downside for the GBP/USD pair, warranting some caution before positioning for any further downfall.

Traders might also prefer to wait on the sidelines amid relatively thin trading volumes on the back of a holiday in Europe and ahead of the highly-anticipated two-day FOMC policy meeting, starting on Tuesday. The Fed is scheduled to announce its decision on Wednesday, which will play a key role in influencing the USD price dynamics and help determine the near-term trajectory for the GBP/USD pair.

In the meantime, traders on Monday will take cues from the release of the US ISM Manufacturing PMI, due later during the early North American session. Apart from this, the broader risk sentiment will drive demand for the safe-haven buck and contribute to producing short-term opportunities around the GBP/USD pair.

Technical levels to watch