GBP/USD flat-lines below mid-1.2400s, downside potential seems limited

The GBP/USD pair struggles to capitalize on Friday's goodish rebound of over 65 pips from the 1.2365 area and kicks off the new week on a subdued note. Spot prices seesaw between tepid gains/minor losses through the early European session and currently trade around the 1.2435 region, nearly unchanged for the day.

A combination of factors assists the US Dollar (USD) to gain some positive traction on the first day of the new week, which, in turn, is seen acting as a headwind for the GBP/USD pair. The recent hawkish signals by several Federal Reserve (Fed) officials reaffirmed market bets for another 25 bps lift-off at the next FOMC meeting in May. Moreover, the incoming US macro data suggests that the world's largest economy remained resilient and supports prospects for further policy tightening by the Fed. Apart from this, a generally weaker risk tone benefits the Greenback's relative safe-haven status.

The market sentiment remains fragile amid worries about economic headwinds stemming from rising borrowing costs. This is evident from a fresh leg down in the equity markets and drives some haven flows towards the buck. The downside for the GBP/USD pair, however, remains cushioned, at least for the time being, amid rising bets for an additional interest rate hike by the Bank of England (BoE) in May. In fact, the markets now see over a 90% chance of a 25-bps rate hike in May. The bets were lifted by last week's release of stronger UK wage growth data and the stubbornly high inflation figures.

In the absence of any relevant market-moving economic releases, either from the UK or the US, the aforementioned mixed fundamental backdrop warrants some caution before placing aggressive directional bets around the GBP/USD pair. Traders also seem reluctant ahead of this week's key macro data from the US, including the Advance Q1 GDP print on Thursday and the Fed's preferred inflation gauge - the Core PCE Price Index - on Friday. The data will play a key role in influencing the near-term USD price dynamics and help determine the near-term trajectory for the major.

Technical levels to watch