Sterling will gain support if the convincing break of 1.3000 is confirmed, although there looks to be little value in chasing the pair higher in the very short term.
US economic data dominated during Friday with the UK currency initially pushing significantly higher after weaker than expected releases for both consumer prices and retail sales.
GBP/USD initially pushed to challenge the 1.3000 area and a convincing break above this level was important in triggering substantial stop-loss dollar selling. This momentum propelled the pair sharply higher to a peak in the 1.3100 area and the highest level for over 10 months.
There was further political uncertainty surrounding the UK outlook with continued reports of divisions with the government, especially over Brexit policy.
The latest round of Brexit talks between the UK Brexit Secretary Davis and chief EU negotiator Barnier will take place this week with markets continuing to look for evidence on the underlying stance from both the EU and UK sides.
Any evidence of a clear move towards transitional arrangements would tend to support confidence, especially given the risk that delays in making headway would increase concerns surrounding the risk of a destabilising exit.
There will also be caution ahead of the UK consumer inflation data on Tuesday given the potential impact on Bank of England policy. A higher than expected inflation rate would increase pressure for the central bank to raise interest rates at the August policy meeting.
A lower than expected release would curb pressure for a tighter monetary policy.
The latest CFTC data recorded the smallest short, non-commercial Sterling position for 7 weeks which will lessen the potential for a further round of short covering.
The strength of commodity prices and confidence in the global outlook will continue to provide net Sterling support, although there is the risk of complacency surrounding global risk and equities.
Markets will focus on the 1.3000 area in the short term with a boost to underlying Sterling sentiment if there is a successful test of this support area. GBP/USD drifted lower to the 1.3070 area ahead of the US open on Monday with the dollar able to secure only a limited recovery.
GBP/USD 4-Hour Chart