GBP/USD consolidates below mid-1.2900, but downside potential appears limited

GBP/USD started the new week on a subdued note during the Asian session and traded in a narrow range around the 1.2930 area. However, the fundamental backdrop warrants caution before any substantial correction in spot prices from the four-month high of 1.2990 hit last Wednesday.

The U.S. dollar (USD) is hovering near multi-month lows amid concerns that U.S. President Donald Trump’s tariffs and retaliatory measures from other countries could hurt the U.S. economy. In addition, lower-than-expected U.S. inflation and signs of a cooling U.S. labor market could force the Federal Reserve to cut interest rates several times this year. This in turn has put the US dollar bulls on the defensive and provided a tailwind for the GBP/USD pair.

Survey data released by the University of Michigan on Friday showed that the consumer confidence index plummeted to a nearly 2-1/2-year low in March, further confirming the market's bets on further policy easing by the Federal Reserve. In addition, concerns that Trump's aggressive economic policies could push up prices have caused inflation expectations to soar. In addition, the generally positive tone in Asian stock markets was also seen as weakening demand for the safe-haven dollar.

On the other hand, the British pound (GBP) struggled to attract buyers following the release of poor domestic data on Friday, which showed that the UK economy unexpectedly contracted by 0.1% in January. However, investors appear to believe that the Bank of England (BoE) will be slower to cut interest rates than other central banks, including the Federal Reserve. This in turn favors GBP bulls and suggests a resistance path to the upside for GBP/USD.

Traders are now focused on the U.S. economic calendar, with the release of monthly retail sales and the Empire State Manufacturing Index expected to pick up some momentum late in the North American session. However, the focus will remain on key central bank event risk – the outcome of the much-anticipated two-day FOMC monetary policy meeting on Wednesday, followed by the Bank of England policy meeting on Thursday.