GBP/USD retakes 1.2600 amid modest USD weakness; upside potential seems limited

GBP/USD regains positive traction on Monday amid the emergence of some USD selling.

Expectations for a less aggressive BoE rate cut underpin the GBP and remain supportive.

Bets for an extended pause on rates by the Fed could limit USD losses and cap the major.

The GBP/USD pair attracts some dip-buyers during the Asian session on Monday and now seems to have stalled its retracement slide from levels beyond the 1.2700 mark, or over a two-month peak touched last week. The intraday move up lifts spot prices back above the 1.2600 round figure in the last hour and is sponsored by a modest US Dollar (USD) weakness. 

The growing pessimism over the outlook for the US economy, along with bets for further policy easing by the Federal Reserve (Fed), fails to assist the buck to capitalize on a three-day-old recovery from over a two-month low. In fact, the USD Index (DXY), which tracks the Greenback against a basket of currencies, kicks off the new week on a weaker note and has now reversed a major part of Friday's move up to over a one-week high. 

The British Pound (GBP), on the other hand, continues with its relative outperformance amid expectations for a less aggressive policy easing by the Bank of England (BoE). That said, concerns about US President Donald Trump's reciprocal tariffs and their impact on the UK economy might hold back the GBP bulls from placing fresh bets. Furthermore, geopolitical risks could limit deeper USD losses and cap gains for the GBP/USD pair. 

Meanwhile, signs that the disinflation process in the US has stalled bolstered the case for the Fed to adopt a wait-and-see approach to future interest rate cuts could also act as a tailwind for the USD. This might further contribute to keeping a lid on the GBP/USD pair and warrants some caution before positioning for the resumption of the recent uptrend from sub-1.2100 levels, or the year-to-date trough touched on January 13.

Traders now look forward to important US macro data scheduled at the beginning of a new month, starting with the release of the ISM Manufacturing PMI, for some meaningful impetus. The focus, however, will be on the closely-watched US monthly employment details on Friday. The popularly known Nonfarm Payrolls (NFP) would drive expectations about the Fed's rate-cut path and drive the USD demand in the near term.