GBP/USD steadily climbs back closer to mid-1.3100s, lacks follow-through

• GBP/USD gained positive traction on Monday and reversed the previous day’s modest losses.
• A positive risk tone undermined the safe-haven USD and extended some support to the major.
• Hawkish Fed expectations, the Ukraine crisis favours the USD bulls and should cap spot prices.

The GBP/USD pair edged higher through the early European session and climbed to a fresh daily high, around the 1.3135 region in the last hour.

Having shown some resilience below the 1.3100 round-figure mark, the GBP/USD pair attracted some buying on the first day of a new week and has now reversed the previous day's modest losses. A positive risk tone acted as a headwind for traditional safe-haven assets, including the US dollar, which, in turn, was seen as a key factor that extended support to the major. That said, the uncertainty over Ukraine should keep a lid on any optimistic move in the markets.

In the latest developments, Ukraine accused Russian forces of carrying out a massacre in the town of Bucha. British Prime Minister Boris Johnson said that his government would step up sanctions, as well as military and humanitarian support for Ukraine. Moreover, German defence minister Christine Lambrecht said on Sunday that the European Union must discuss banning imports of Russian gas. This, along with hawkish Fed expectations, should act as a tailwind for the buck.

Investors seem convinced that the Fed would adopt a more aggressive policy stance to combat stubbornly high inflation and have been pricing in a 100 bps rate hike over the next two meetings. The market bets were reaffirmed by the US monthly jobs report on Friday. This, in turn, pushed the yield on the two-year US government bond - which is highly sensitive to rate hike expectations - to a three-year top and supports prospects for the emergence of some USD dip-buying.

The fundamental backdrop favours the USD bulls, though market participants might prefer to wait on the sidelines ahead of the release of the FOMC minutes on Wednesday. In the meantime, traders might take cues from a scheduled speech by the Bank of England Governor Andrew Bailey. This further makes it prudent to wait for some follow-through buying before positioning for the resumption of the recent recovery from the YTD low, around the 1.3000 psychological mark touched in March.

Technical levels to watch