GBP/USD weakens to mid-1.2700s as USD attracts haven flows amid Middle East tensions

• GBP/USD attracts some sellers on Monday amid a modest USD uptick.
• Geopolitical risks turn out to be a key factor benefitting the Greenback.
• Dovish Fed expectations should cap the buck and limit further downside. 

The GBP/USD pair kicks off the new week on a weaker note and for now, seems to have stalled a two-day-old recovery from the 1.2665 area, or the lowest level since July touched last Thursday. Spot prices currently trade around the mid-1.2700s as traders look forward to this week's important macro releases from the UK and the US. 

The monthly UK employment data and the US Producer Price Index (PPI) will be published on Tuesday, which will be followed by the UK and the US consumer inflation figures on Wednesday. Apart from this, the Preliminary UK Q2 GDP on Thursday will influence the sentiment surrounding the British Pound (GBP) and help determine the next leg of a directional move for the GBP/USD pair. 

In the meantime, the recent move by the Bank of England (BoE) to cut interest rates on August 1 for the first time since 2020, bets for two more rate cuts in 2024 and the ongoing riots in the UK continue to undermine the GBP. Furthermore, the risk of a further escalation of geopolitical risks in the Middle East lends some support to the safe-haven US Dollar (USD) and exerts pressure on the GBP/USD pair. 

In fact, the Israeli intelligence community believed that Iran has decided to attack Israel directly and may do so within days in retaliation for the assassination of Hamas leader Ismail Haniyeh in Tehran in late July. That said, expectations for bigger interest rate cuts by the Federal Reserve (Fed) might hold back the USD bulls from placing aggressive bets and act as a tailwind for the GBP/USD pair. 

Hence, it will be prudent to wait for strong follow-through selling before positioning for the resumption of a three-week-old downtrend from the vicinity of mid-1.3000s, or a one-year peak touched in July. In the absence of any relevant market-moving economic releases on Monday, the USD price dynamics will influence the GBP/USD pair and produce short-term trading opportunities.