GBP/USD climbs to 1.2500 neighbourhood on weaker USD, upside potential seems limited

The GBP/USD pair stages a goodish intraday bounce from a two-week low touched earlier this Monday and recovers a part of its heavy losses recorded over the past two sessions. Spot prices climb back closer to the 1.2500 psychological mark during the first half of the European session and, for now, seem to have stalled the retracement slide from over a one-year high, around the 1.2680 region set last week.

A generally positive tone around the equity markets undermines the safe-haven US Dollar (USD), which, in turn, is seen as a key factor pushing the GBP/USD pair higher. Meanwhile, the USD pullback from its highest level since early February seems limited amid a further rise in the US Treasury bond yields, bolstered by fresh speculations that the Federal Reserve (Fed) will stick to its hawkish stance. In fact, preliminary May reading from the University of Michigan released on Friday showed that consumers see prices over the next five years climbing at an annual rate of 3.2%  - the highest since 2011. This could force the Federal Reserve (Fed) to keep interest rates higher for longer.

Additional details of the Michigan survey revealed that consumer sentiment slumped to a six-month low in May in the wake of a standoff to raise the federal government's borrowing. This further fuels worries about an imminent recession and should lend some support to the safe-haven Greenback. Apart from this, the Bank of England (BoE) Governor Andrew Bailey's less hawkish comments last Thursday, saying that there are good reasons to think that CPI will fall sharply, might continue to undermine the British Pound. The aforementioned factors might hold back bullish traders from placing aggressive bets around the GBP/USD pair and cap the upside for the GBP/USD pair.

Even from a technical perspective, Friday's breakdown through support marked by the lower end of over a one-month-old ascending channel suggests that the path of least resistance for spot prices is to the downside. Hence, any subsequent move up is more likely to attract fresh sellers at higher levels and runs the risk of fizzling out rather quickly. In the absence of any relevant market-moving macro data from the US, traders look to the US economic docket, featuring the Empire State Manufacturing Index. This, along with a scheduled speech by Minneapolis Fed President Neel Kashkari and the broader risk sentiment, will influence the USD and provide some impetus to the GGBP/USD pair.

Technical levels to watch