GBP/USD remains on the defensive below 1.3500 on firmer USD; downside seems limited

• GBP/USD ticks lower as a slump in the JPY assists the USD to move away from the post-NFP low.
• Rising Fed rate cut bets and a positive risk tone should keep a lid on any meaningful USD upside.
• Fiscal concerns offset BoE expectations and might hold back the GBP bulls from placing fresh bets.

The GBP/USD pair kicks off the new week on a softer note and slips back below the 1.3500 psychological mark during the Asian session. The downtick, however, lacks bearish conviction, warranting caution for bearish traders and positioning for an extension of Friday's late pullback from the 1.3555 area, or a nearly three-week high.

The US Dollar (USD) gains some positive traction and moves away from its lowest level since July 28, touched in reaction to the disappointing US monthly employment details on Friday, which, in turn, is seen weighing on the GBP/USD pair. The USD move up could be attributed to a slump in the Japanese Yen (JPY), led by domestic political turmoil, and runs the risk of fading rather quickly amid rising Federal Reserve (Fed) rate cut bets.

The headline US Nonfarm Payrolls (NFP) report showed that the economy added just 22,000 jobs in August, missing consensus estimates by a big margin. Adding to this, revisions to earlier prints revealed the economy lost 13,000 jobs in June, marking the first monthly decline since December 2020 and pointing to a softening US labor market. This fueled speculations about a more aggressive interest rate cut by the Fed and should cap the USD.

According to the CME Group's FedWatch Tool, traders have fully priced in at least a 25-basis-point (bps) rate cut in September and now see the possibility that the US central bank could lower borrowing costs three times by the end of this year. This keeps the US Treasury bond yields depressed, which, along with the risk-on mood, might keep a lid on any meaningful appreciating move for the safe-haven buck and limit losses for the GBP/USD pair.

The British Pound (GBP), however, might struggle to attract any meaningful buyers amid fiscal uncertainty ahead of the Autumn Budget in November. This, to a larger extent, overshadows the Bank of England's (BoE) cautious path of interest rate cuts due to persistent inflation worries, which, in turn, should cap the GBP/USD pair. This might hold back bulls from placing aggressive bets in the absence of any relevant market-moving economic data.