GBP/USD consolidates around 1.2760 on a softer US Dollar, focus on UK labor data

• GBP/USD recovers its intraday losses on the weaker US Dollar.
• The risk-on mood fades on escalated tension in the Middle East.
• Barclays revised its forecast on the Fed rate cut to March from June.

The GBP/USD treads water near 1.2760 during the European session on Monday, recovering intraday losses as the US Dollar (USD) loses ground on the weaker US bond yields, coupled with the softer Producer Price Index (PPI) data from United States (US). The heightened tension in the Middle East has balanced the risk-on sentiment, particularly following military attacks on Iran-led Houthi targets, conducted by the United States (US) and the United Kingdom (UK) on Friday. This geopolitical development has influenced both the USD's strength and the overall sentiment in the GBP/USD pair.

The US Dollar Index (DXY) trims its intraday gains due to the decline in the US Treasury yields. The 2-year and 10-year yields on US bond coupons stand lower at 4.14% and 3.94%, respectively, by the press time. The increased market speculation regarding potential rate cuts by the US Federal Reserve (Fed) in March has exerted pressure on US yields. This speculation gained momentum, particularly after Barclays revised its forecast on Friday for the first Federal Reserve rate cut, advancing it to March from June.

Moreover, the softer-than-expected Producer Price Index (PPI) data released on Friday might have exerted downward pressure on the US Dollar. According to the US Bureau of Labor Statistics, the December Producer Price Index (PPI) figure was 1.0% year-on-year, compared to the previous reading of 0.8%. The Core PPI year-on-year arrived at 1.8%, down from 2.0% in November. On a monthly basis, both the headline and Core PPI indices remained at 0.1% decline and 0.0%, respectively.

The GBP/USD pair might have gained some ground on on improved production data from the United Kingdom (UK) released on Friday. In November, the United Kingdom's (UK) industrial sector activity rebounded, according to data from the Office for National Statistics (ONS) released on Friday. Total Industrial Production (MoM) remained consistent in line with expectations and contrasted with the previous decline. On an annual basis, UK Manufacturing Production increased in November. However, Total Industrial Output declined by 0.1% in the same period.

Additionally, on Monday, January’s Rightmove House Price Index (MoM) improved by 1.3% against the previous decline of 1.9%. While the year-over-year eased at a 0.7% decline against December’s decline of 1.1%. Traders will likely observe the labor market data including Claimant Count Change and ILO Unemployment Rate (3M).