• GBP/USD gained strong positive traction on Monday and was supported by modest USD weakness.
• The recent fall in the US bond yields and a positive risk tone undermined the safe-haven greenback.
• Aggressive Fed rate hike bets, along with recession fears should limit the USD losses and cap the pair.

The GBP/USD pair witnessed some short-covering on the first day of a new week and build on Friday's late recovery from the 1.1975 region, or the lowest level since June 14. The momentum extended through the mid-European session and pushed spot prices to a fresh daily high, around the 1.2165 region in the last hour.

The recent decline in the US Treasury bond yields, along with signs of stability in the equity markets, undermined the safe-haven US dollar. This, in turn, was seen as a key factor that acted as a tailwind for the GBP/USD pair. That said, any meaningful positive move still seems elusive, warranting caution for bulls.

Fed Chair Jerome Powell last week reaffirmed market bets for more aggressive rate hikes and said that the US central bank remains focused on getting inflation under control. Powell added that the US economy is well-positioned to handle tighter policy. Apart from this, growing recession fears should limit the USD losses.

On the other hand, the Bank of England is expected to adopt a gradual approach toward raising interest rates amid the worsening economic outlook. Furthermore, fresh tensions between the UK and the European Union over the Northern Ireland Protocol of the Brexit agreement might hold back the GBP bulls from placing aggressive bets.

The fundamental backdrop makes it prudent to wait for strong follow-through buying before confirming that the GBP/USD pair has bottomed out in the near term and positioning for any further gains. Traders might also be reluctant amid relatively lighter volumes on the back of a holiday in the US and ahead of this week's key releases.

The minutes of the FOMC meeting are due on Wednesday and will be followed by the key US jobs data on Friday. Investors will closely scrutinize the FOMC minutes and the NFP report for clues about the Fed's policy tightening path. This will play a key role in influencing the USD price dynamics and provide a fresh impetus to the GBP/USD pair.

Technical levels to watch