GBP/USD maintains its bid tone above 1.2200, upside potential seems limited

The GBP/USD pair attracts some buying near a technically significant 200-day SMA support on Monday and stick to its gains through the first half of the European session. The pair is currently placed near the daily high, around the 1.2230 region and remains well supported by a modest US Dollar weakness.

A slight recovery in the global risk sentiment - as depicted by a generally positive tone around the equity markets - prompts fresh selling around the safe-haven buck. That said, a combination of factors might hold back traders from placing aggressive bearish bets around the USD and keep a lid on any meaningful upside for the GBP/USD pair, at least for the time being.

Despite the easing of strict COVID-19 curbs in China, a sharp rise in new infections could delay the full reopening of the economy. This, along with the protracted Russia-Ukraine war, might keep a lid on any optimistic move in the markets. Furthermore, a more hawkish commentary by the Federal Reserve last week supports prospects for the emergence of some USD dip-buying.

In fact, the US central bank indicated that it will continue to raise rates to crush inflation and projected at least an additional 75 bps increase in borrowing costs by the end of 2023. This, in turn, pushes the US Treasury bond yields higher and favours the USD bulls, warranting caution before positioning for any further appreciating move for the GBP/USD pair.

Adding to this, a dovish outcome from the Bank of England meeting, with two MPC members voting to keep interest rates unchanged, could undermine the GBP amid looming recession risks. In the absence of any relevant macroeconomic releases, this might also contribute to capping the GBP/USD pair and suggests that the path of least resistance for spot prices is to the downside.

Technical levels to watch