GBP/USD remains depressed amid bullish USD, hawkish BoE expectations help limit losses

The GBP/USD pair edges lower during the Asian session on Thursday and extends the overnight pullback from the 1.2765 area, or a multi-day peak. The downtick is exclusively sponsored by the underlying bullish sentiment surrounding the US Dollar (USD), though spot prices manage to hold above the 1.2700 mark in the wake of rising bets for further interest rate hikes by the Bank of England (BoE).

The USD Index (DXY), which tracks the Greenback against a basket of currencies, climbs to its highest level since June 12 and is supported by the Federal Reserve's (Fed) hawkish outlook. the In fact, the minutes of the July 25-26 FOMC meeting released on Wednesday revealed that policymakers were divided over the need for more rate hikes, though continued to prioritize the battle against inflation. Moreover, the incoming stronger US macro data points to an extremely resilient economy and keeps the door open for one more 25 bps lift-off later this year.

The outlook pushes the yield in the benchmark 10-year US government bond to its highest level since 2008 and acts as a tailwind for the buck. Apart from this, a generally weaker tone around the equity markets turns out to be another factor that benefits the Greenback's relative safe-haven status and exerts some pressure on the GBP/USD pair. Against the backdrop of concerns about the worsening economic conditions in China, worries about headwinds stemming from rapidly rising borrowing costs fuel recession fears and weigh on investors' sentiment.

The downside for the GBP/USD pair, however, seems cushioned, at least for the time being, amid growing acceptance that the UK central bank will raise interest rates again at its next monetary policy meeting in September. The expectations were reaffirmed by stronger UK wage growth data released on Tuesday, which added to worries about long-term inflation. This, along with the upbeat UK GDP report released last week and Wednesday's slightly higher-than-expected UK CPI print, should allow the BoE to continue tightening its monetary policy.

The aforementioned mixed fundamental backdrop makes it prudent to wait for strong follow-through selling before confirming that the recent bounce from the 100-day Simple Moving Average (SMA), around the 1.2615 region, or the lowest level since June touched last week, has run its course. Market participants now look to the US economic docket, featuring the usual Weekly Initial Jobless Claims and the Philly Fed Manufacturing Index. This, along with the US bond yields will influence the USD and provide some impetus to the GBP/USD pair.

Technical levels to watch