GBP/USD trades with modest losses around mid-1.2000s, lacks follow-through selling

• GBP/USD remains on the defensive for the second successive day amid modest USD strength.
• Hawkish Fed expectations and the prevalent risk-off mood continue to underpin the greenback.
• Expectations that the BoE rate-hiking cycle is nearing the end further seem to weigh on the GBP.
• Traders await this week’s key macro data from the UK and the US for a fresh directional impetus.

The GBP/USD pair edges lower for the second straight day on Monday and remains on the defensive through the first half of the European session. The pair is currently placed near the mid-1.2000s, just a few pips above the daily low, and seems vulnerable to extending last week's retracement slide from the vicinity of the 1.2200 mark.

A combination of supporting factors assists the US Dollar to reverse a modest intraday slide and hold steady near a one-high, which, in turn, is seen weighing on the GBP/USD pair. A more hawkish commentary by several FOMC members, including Fed Chair Jerome Powell, back the case for further policy tightening by the US central bank. This, along with the prevalent risk-off environment amid looming recession risks, continue to act as a tailwind for the safe-haven greenback.

In fact, investors now seem convinced that the Fed will stick to its hawkish stance and the bets were reaffirmed by the incoming US macro data. Against the backdrop of a blockbuster US monthly jobs report, the Labor Department's annual revisions of CPI on Friday showed that consumer prices rose in December instead of falling as previously estimated. Separately, the University of Michigan survey's one-year inflation expectations climbed to 4.2% this month from the 3.9% previous.

This raises the risk of higher inflation print for January and dashes hopes for an imminent pause in the Fed's rate-hiking cycle. In contrast, the Bank of England (BoE) is becoming increasingly unsure as to whether further policy tightening is warranted. It is worth recalling that BoE said that inflation will fall more rapidly during the second half of 2023. Moreover, the UK central bank, in its monetary policy statement, removed the phrase that they would "respond forcefully, as necessary".

The aforementioned fundamental backdrop suggests that the path of least resistance for the GBP/USD pair is to the downside. That said, traders might refrain from placing aggressive bets ahead of this week's key macro releases from the UK and the US. The UK monthly jobs report is due on Tuesday, which will be followed by the US CPI report. The focus will then shift to the UK CPI report, along with the US Retail Sales data, on Wednesday and the US Producer Price Index (PPI) on Thursday.

In the meantime, the USD price dynamics will continue to play a key role in influencing the GBP/USD pair and allow traders to grab short-term opportunities. Later during the early North American session, traders will take cues from a scheduled speech by Fed Governor Michelle Bowman. Apart from this, the broader risk sentiment should drive the USD demand and provide some impetus to the major.

Technical levels to watch