- GBP/USD gains some positive traction for the second successive day amid a modest USD downtick.
- The fundamental backdrop warrants caution before positioning for any further appreciating move.
- Bets for a 50 bps Fed rate hike in March, recession risks could limit the USD losses and cap the pair.
The GBP/USD pair builds on the overnight modest bounce from the 1.1800 neighbourhood, or its lowest level since November and edges higher for the second successive day on Thursday. The pair sticks to a mildly positive tone and trades above the mid-1.1800s during the early part of the European session, though any meaningful upside still seems elusive.
The US Dollar (USD) bulls take a breather following the recent strong run-up to over a three-month high, which, in turn, is seen as a key factor lending some support to the GBP/USD pair. That said, the prospects for more aggressive policy tightening by the Federal Reserve (Fed), along with looming recession risks, act as a tailwind for the safe-haven Greenback and should cap gains for the major, at least for the time being.
In fact, the markets are now pricing in a greater chance of a jumbo 50 bps lift-off at the upcoming FOMC monetary policy meeting on March 21-22. The bets were lifted by hawkish comments by Fed Chair Jerome Powell, reiterating that interest rates would have to go higher and possibly faster to tame stubbornly high inflation. This remains supportive of elevated US Treasury bond yields and favours the USD bulls.
The market sentiment, meanwhile, remains fragile amid growing worries about economic headwinds stemming from rapidly rising borrowing costs. Apart from this, fading optimism over a strong economic recovery in China tempers investors' appetite for perceived riskier assets, which is evident from a softer tone around the equity markets and adds credence to the near-term positive outlook for the Greenback.
Apart from this, speculations that the Bank of England (BoE) would pause the current tightening cycle suggest that the path of least resistance for the GBP/USD pair is to the downside. Hence, any subsequent move up might still be seen as a selling opportunity. Traders now look to the US macro data - Challenger Job Cuts and the usual Weekly Initial Jobless Claims - for a fresh impetus and short-term opportunities.
Technical levels to watch
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