GBP/USD steadies as US Dollar weakens

• The British Pound gains ground with GBP/USD trading near 1.3470 as the US Dollar remains under pressure.
• UK inflation rose to 3.6% in June, while unemployment hit 4.7%, clouding the BoE's rate outlook.
• Markets are pricing in a 70% chance of a 25 bps rate cut by the BoE at its August meeting.

The British Pound (GBP) is staging a modest rebound against the US Dollar (USD) on Monday, with GBP/USD trading around the 1.3480 mark during the American trading session. The upside in Sterling comes as the Greenback weakens broadly, weighed down by softening US Treasury yields and lingering uncertainty surrounding upcoming trade negotiations and the Federal Reserve's (Fed) policy path.

Meanwhile, UK interest rate expectations remain in flux following a mixed batch of macroeconomic data last week, keeping GBP bulls cautiously optimistic ahead of the Bank of England's (BoE) August policy decision.

The US Dollar Index (DXY) is trading on the back foot near 98.10, down for a second consecutive session amid escalating trade tensions and mixed signals from Fed officials regarding the outlook for the July rate cut. A fourth consecutive daily drop in the 10-year US Treasury yield, to around 4.40%, is also posing a headwind for the USD. While US economic data remains generally resilient, dovish rhetoric from Fed officials and renewed geopolitical jitters are denting demand for the Greenback.

Adding to the Pound's appeal, markets are now largely pricing in a 25-basis-point rate cut by the BoE at its upcoming August 7 meeting, which would lower the Bank Rate to 4.00% from its current level of 4.25%. However, last week's economic data has complicated the policy outlook. While the June Consumer Price Index (CPI) unexpectedly rose to 3.6%, keeping inflation well above the BoE's 2% target, the labour market showed signs of cooling, with unemployment climbing to 4.7% and payroll numbers shrinking. Money markets now assign a nearly 70% chance of a 25-basis-point rate cut at the BoE's August 7 meeting, with rate cuts totaling 50-75 bps priced in the second half of 2025. Still, sticky inflation is limiting the central bank's room to maneuver, lending Sterling some support.

Looking ahead, investor focus will shift to Thursday's preliminary S&P Global PMIs and Friday's UK Retail Sales report, which could influence short-term rate expectations and Sterling's near-term direction. Strong PMI or consumer spending figures may temper rate cut bets, while disappointing data would likely reinforce dovish expectations and weigh on the Pound.