GBP/USD recovers to 1.2100 amid modest USD decline, further positive move seems unlikely

• GBP/USD is rebounding quickly from the multi-day low reached earlier this Monday.
• The recovery in risk sentiment weakens the USD and offers some support.
• Bullish expectations from the Fed could help limit the USD slide and in turn cap the pair.

GBP/USD takes advantage of its nice intraday bounce from the 1.2030 zone, or a multi-day low hit earlier this Monday, and scales higher into the middle of the European session. The pair rallied back to 1.2100 in the past hour and reversed much of Friday’s decline amid some US dollar selling.

The modest recovery in global risk sentiment, reflected in the turnaround in equity markets, is putting some downward pressure on the dollar. Apart from this, a softer tone around US Treasury yields further undermines the dollar, which in turn is seen as a key factor providing some support for GBP/USD.

That being said, increased bets on further monetary policy tightening by the Federal Reserve (Fed) should help limit the dollar’s slide and cap GBP/USD gains. Investors now seem convinced that the US central bank will maintain its hawkish stance for longer, given the risk of a rise in inflation in January, due to be released on Tuesday.

Speculation was fueled by revised data for the previous month, which showed consumer prices rose in December instead of falling as previously estimated. In addition, one-year inflation expectations from the University of Michigan survey rose to 4.2% this month, from 3.9% in January. This, in turn, favors USD bulls.

Apart from this, the dovish assessment of last week’s Bank of England (BOE) decision warrants some caution before placing aggressive bullish bets on GBP/USD. In the absence of relevant economic releases, traders are looking forward to Fed Governor Michelle Bowman’s speech ahead of the UK jobs data on Tuesday.

Technical levels to watch