GBP/USD climbs to fresh daily high, further beyond 1.2200 amid sustained USD selling

• GBP/USD regains positive traction on Monday amid the prevalent USD selling bias.
• Diminishing odds for more aggressive Fed rate hikes continue to weigh on the USD.
• A softer risk tone, rebounding US bond yields to limit the USD losses and cap the pair.

The GBP/USD pair attracts fresh buying on the first day of a new week and jumps back above the 1.2200 mark during the early part of the European session. Spot prices, however, remain well below a one-month high, around the 1.2245 touched on Friday.

The US dollar languished near its lowest level since July 5, which is turning out to be a key factor lending support to the GBP/USD pair. Market participants continue to scale back their expectations for more aggressive rate hikes by the Federal Reserve amid worries about an economic downturn. This, to a larger extent, overshadows Friday's stronger US Personal Consumption Expenditures (PCE) and continues to weigh on the greenback.

The British pound is further underpinned by rising bets for a 50 bps rate hike by the Bank of England, though a combination of factors could cap gains for the GBP/USD pair. The recent optimistic move in the equity markets ran out of steam amid growing recession fears. This, along with a modest bounce in the US Treasury bond yields, should help limit the downside for the USD and act as a headwind for the major, at least for now.

Investors might also refrain from placing aggressive bets and prefer to wait on the sidelines ahead of the Bank of England policy meeting on Thursday. Apart from this, important US macro data scheduled at the beginning of a new month would determine the next leg of a directional move for the GBP/USD pair. A rather busy week kicks off with the release of the ISM Manufacturing PMI, which could provide some trading impetus to the major.

Technical levels to watch