GBP/USD with modest losses around the 1.2050 zone, no follow-on selling

• GBP/USD remains on the defensive for the second day in a row amid modest USD strength.
• Dovish expectations around the Fed and the prevailing risk aversion state continue to benefit the USD.
• Expectations that the Bank of England rate hike cycle is coming to an end seem to continue to weigh on sterling.
• Traders look to this week’s key UK and US macro data for further directional momentum.

The pair GBP/USD it falls back on Monday for the second day in a row and remains on the defensive through the first half of the European session. The pair is currently near the 1.2050 areajust a few pips above the daily low, and looks vulnerable to extending last week’s pullback from near the 1.2200 level.

A combination of supportive factors helps the US dollar reverse a modest intraday decline and hold near a 1-week high, which in turn weighs on GBP/USD. The more hawkish comments from various FOMC membersincluding Fed Chairman Jerome Powell, support the arguments in favor of further tightening of monetary policy by the US central bank. This, coupled with the prevailing risk-off environment amid downside risks, continues to act as a tailwind for the safe-haven dollar.

In fact, investors now seem convinced that the Fed will maintain its hawkish stance, and expectations were confirmed by US macroeconomic data. Against the backdrop of a highly successful monthly US jobs report, the Labor Department’s annual CPI revisions showed on Friday that consumer prices rose in December instead of falling as previously estimated. Besides, One-year inflation expectations from the University of Michigan survey rose to 4.2% this month from 3.9% prior.

This increases the risk of a spike in inflation in January and dashes hopes of an imminent pause in the Fed’s rate hike cycle. On the contrary, the Bank of England (BoE) is increasingly uncertain about the advisability of further tightening of its monetary policy. It should be remembered that the BoE stated that inflation will fall more rapidly during the second half of 2023. In addition, the British central bank, in its statement on monetary policy, removed the phrase that they would “respond vigorously, as needed”.

The aforementioned fundamental background suggests that the path of least resistance for GBP/USD is to the downside. That being said, traders could refrain from opening aggressive positions. ahead of this week’s key UK and US macroeconomic releases. The monthly UK employment report will be released on Tuesday, followed by the US CPI. Later in the week, UK CPI and US retail sales will be reported on Wednesday and the Producer Price Index (PPI) on Thursday.

In the meantime, USD price dynamics will continue to play a key role in influencing GBP/USD and will allow traders to take advantage of some short-term opportunities. Later in the American session, traders will follow Fed Governor Michelle Bowman’s speech. On the other hand, overall risk sentiment should drive demand for the dollar and give the pair some momentum.

GBP/USD technical levels to watch