GBP/USD holds steady around 1.3500; seems vulnerable near multi-week low

• GBP/USD draws support from a modest USD pullback, though the upside potential seems limited
• Reduced Fed rate cut bets and trade jitters could underpin the safe-haven buck and cap the major.
• Friday's weaker UK GDP reaffirms August BoE rate cut bets and could act as a headwind for the GBP.

The GBP/USD pair enters a bearish consolidation phase during the Asian session and oscillates in a narrow band around the 1.3500 psychological mark, just a few pips above a three-week low touched on Friday. Moreover, the fundamental backdrop suggests that the path of least resistance for spot prices remains to the downside.

A modest US Dollar (USD) pullback from its highest level since June 25 turns out to be a key factor lending some support to the GBP/USD pair. However, diminishing odds for a near-term reduction in borrowing costs by the Federal Reserve (Fed), amid concerns that US President Donald Trump's trade tariffs would boost inflation, should act as a tailwind for the buck. Apart from this, the risk-off impulse could further benefit the Greenback's relative safe-haven status and contribute to capping the currency pair.

In a further escalation of the trade war, Trump imposed a 30% tariff on imports from Mexico and the European Union starting on August 1. This comes on top of a string of over 20 similar tariff notices Trump has issued since last Monday and a 50% tariff on US copper imports, which continues to weigh on investors' sentiment. The anti-risk flow is evident from a generally weaker tone around the equity markets and should limit any meaningful corrective decline for the safe-haven buck and cap the GBP/USD pair.

Meanwhile, the UK Office for National Statistics reported on Friday that the economy unexpectedly contracted for the second month in a row, by 0.1% in May, following a 0.3 % decline registered in April. Adding to this, the UK Industrial Production fell at a faster pace of 0.9% compared to the 0.6% drop in April, while manufacturing output also fell short of estimates and declined 1% in May. This reinforces bets that the Bank of England (BoE) could reduce interest rates in August and should weigh on the British Pound (GBP).

Traders might also refrain from placing aggressive bets ahead of this week's release of the latest consumer inflation figures from the US and the UK, scheduled on Tuesday and Wednesday, respectively. Furthermore, the BoE Governor Andrew Bailey's appearance on Tuesday and speeches from influential FOMC members should contribute to providing some meaningful impetus to the GBP/USD pair.