British Pound recovers slightly from three-week low as USD bulls pause for a breather

The GBP/USD pair recovers slightly from a three-week low, touched during the Asian session on Monday, and climbs closer to mid-1.3300s in the last hour. However, the underlying strong bullish sentiment surrounding the US Dollar (USD) warrants some caution before positioning for any further appreciating move.

The USD Index (DXY), which tracks the Greenback against a basket of currencies, shot to a two-week high on Friday in reaction to the upbeat US Nonfarm Payrolls (NFP) report, which reaffirmed hawkish US Federal Reserve (Fed) expectations. The closely-watched employment details showed that the economy added 172K jobs in May, compared to 85K expected and the previous month's upwardly revised reading of 179K. Additional details revealed that the Unemployment Rate held steady at 4.3%, as anticipated, offsetting the widely expected slowdown in Average Hourly Earnings growth to the 3.4% YoY rate from 3.6% in April.

This comes on top of concerns that the war-driven rise in energy prices would fuel inflation and lift bets for an eventual rate hike by the Fed. According to the CME Group's FedWatch Tool, traders are currently pricing in over a 70% chance that the US central bank will raise borrowing costs by at least 25 basis points (bps) in 2026. This, along with geopolitical uncertainties, should continue to act as a tailwind for the safe-haven Greenback. Furthermore, the UK political turmoil, amid a challenge to Prime Minister Keir Starmer's leadership, could undermine the British Pound (GBP) and contribute to keeping a lid on the GBP/USD pair.

Traders might also opt to wait for further development surrounding the Middle East crisis. US President Trump called Israeli Prime Minister Benjamin Netanyahu to tell him not to attack Iran in response to three waves of ballistic missiles at Israel’s Ramat David air base on Sunday night. Trump further told Axios that they are very close to a final deal with Iran and that he does not want it to blow up because of what’s happening now. However, the US and Iran remain at odds over several key issues, including Tehran's nuclear program and the critical Strait of Hormuz. This keeps geopolitical risks in play and favors the USD bulls.