Ella 
GBP/USD attracted some bargain hunting after covering a weekly bearish gap in Asia on Monday and climbed further above the psychological 1.2500 mark, latest to hit a new daily top. GBP/USD is currently trading around 1.2520-1.2525, up nearly 0.50% on the day, and appears to have ended a four-day losing streak, even if a clear rebound from the three-month low hit last Thursday remains elusive.
Bank of Japan Governor Kazuo Ueda’s hawkish remarks last weekend drove a strong recovery in demand for the Japanese yen (JPY), putting some pressure on the U.S. dollar (USD). Separately, the positive tone in the stock market also dragged the safe-haven dollar back from its highest level since March last week and became another factor supporting GBP/USD.
Data released over the weekend showed that China’s consumer price inflation rebounded into positive territory in August, while the producer price index fell at a slower pace than for the whole year. This has led to market expectations that China, the world’s second largest economy, is stabilizing after experiencing a sharp economic decline this year. Coupled with market expectations that China will introduce more stimulus measures, investors’ investment preferences have been enhanced.
That said, other indicators showed that China’s manufacturing sector continued to shrink in August, growth in the services sector slowed, and the economic picture was mixed. This could dampen market optimism. Additionally, a growing number of investors believe the Federal Reserve (Fed) will maintain a hawkish stance, which should help stem the dollar’s decline and weigh on GBP/USD.
Market participants appear to believe the Fed will keep interest rates higher for longer and have been pricing in the prospect of another 25 basis point rate hike by the end of the year. The Wall Street Journal reported that some officials are still inclined to err on the side of going too far in raising interest rates. This remains supportive of rising U.S. Treasury yields, which is beneficial for dollar bulls.
On the other hand, Bank of England (BOE) Governor Andrew Bailey warned last Wednesday that there may still be room for further rises in borrowing costs as inflation remains high. However, Bailey told lawmakers that the central bank was very close to ending its streak of rate hikes. This may further dampen the apparent gains in GBP/USD, at least for now.
Traders may also avoid making aggressive bets, opting to wait and see ahead of key UK and US economic data releases this week. The UK jobs report will be released on Tuesday, followed by the UK monthly GDP report and the latest US consumer inflation data on Wednesday. In addition, the US producer price index will be released on Thursday.
However, against the above fundamental backdrop, it would be prudent to wait for strong follow-through buying in GBP/USD before the currency confirms its recent bottom and moves higher further. On the other hand, confirming the negative outlook would require GBP/USD to break below the all-important 200-day simple moving average around 1.2425.
