British Pound strengthens beyond mid-1.3300s vs weak USD amid fresh Iran diplomacy hopes

The GBP/USD pair builds on Friday's modest bounce from a three-week low and gains strong follow-through positive traction at the start of a new week. This marks the second straight day of a positive move and lifts spot prices above mid-1.3300s during the Asian session amid a broadly weaker US Dollar (USD).

The USD Index (DXY), which tracks the Greenback against a basket of currencies, moves away from the vicinity of the monthly high, retested last week, amid reviving hopes for a diplomatic resolution to end a five-month-old US-Iran conflict. In fact, the US paused its bombing campaign following 13 consecutive nights of strikes on Iranian targets late on Friday, prompting Tehran to suspend its retaliatory attacks against Washington's allies in the Middle East.

US ambassador to the United Nations (UN) Mike Waltz said that while forces remained locked and loaded, President Donald Trump wants to give negotiations a little bit of room. Traders were quick to unwind some of the geopolitical risk premium, undermining the safe-haven buck. Moreover, the latest developments trigger a sharp fall in oil prices and ease inflation fears, tempering US Federal Reserve (Fed) rate hike bets and further weighing on the Greenback.

Meanwhile, restricted shipping traffic through the Strait of Hormuz and the Bab el-Mandeb Strait helps limit losses for oil prices. USD bears might also refrain from placing aggressive bets and opt to wait for the outcome of the highly-anticipated two-day FOMC meeting on Wednesday. Investors will look for more cues about the Fed's policy path, which, along with geopolitical developments, will drive the USD and provide some meaningful impetus to the GBP/USD pair.