GBP/USD corrects from one-year peak amid modest USD strength, downside seems cushioned

• GBP/USD kicks off the new week on a weaker note amid the emergence of some USD buying.
• September Fed rate cut bets should cap gains for the USD and lend some support to the pair.
• Diminishing odds for an August BoE rate cut also warrant caution before placing bearish bets.

The GBP/USD pair attracts some selling during the Asian session on Monday and for now, seems to have snapped a three-day winning streak to the 1.3000 neighborhood, or its highest level since July 2023. Spot prices currently trade around the 1.2965 area, down just over 0.15% for the day amid a modest US Dollar (USD) strength, though any meaningful depreciating move seems elusive. 

The attack on US Presidential candidate Donald Trump on Sunday raises the level of political uncertainty and drives some haven flows, allowing the USD to recover a part of Friday's slump to over a three-month low. That said, growing acceptance that the Federal Reserve (Fed) will soon begin its rate-cutting cycle should continue to act as a headwind for the Greenback and lend some support to the GBP/USD pair.

In fact, the CME Group's FedWatch tool points to over a 90% chance that the Fed will lower borrowing costs by 25 basis points (bps) in September. Moreover, the markets are pricing in the possibility of another interest rate cut in December and the bets were lifted by the softer-than-expected US consumer inflation figures released last week. This might hold back traders from placing fresh bullish bets around the USD.

The British Pound (GBP), on the other hand, draws support from diminishing odds of a rate cut by the Bank of England (BoE) in August, especially after data released last week showed that Britain's economy grew more quickly than expected, by 0.4% in May. This, in turn, warrants some caution before confirming that the GBP/USD pair might have formed a near-term top and positioning for any meaningful downfall. 

Market participants now look to the release of the Empire State Manufacturing Index from the US. The focus, however, will remain on Fed Chair Jerome Powell's speech, which, along with the US Treasury bond yields and the broader risk sentiment, will influence the USD. Nevertheless, the aforementioned fundamental backdrop supports prospects for the emergence of some dip-buying around the GBP/USD pair.