GBP/USD trades with modest losses below mid-1.2400s, downside potential seems limited

The GBP/USD pair comes under some selling pressure on Thursday and retreats further from the weekly high, around the 1.2470-1.2475 area touched the previous day. The pair remains on the defensive through the early part of the European session and is currently placed near the daily low, around the 1.2420 region.

A combination of factors continues to act as a tailwind for the US Dollar (USD), which, in turn, is seen exerting some downward pressure on the GBP/USD pair. The prospects for further policy tightening by the Federal Reserve (Fed), along with a weaker rise sentiment, lend some support to the safe-haven Greenback. That said, rising bets for an additional interest rate hike by the Bank of England (BoE) might hold back bearish traders from placing aggressive bets and help limit losses for the major.

The markets now seem convinced that the US central bank will lift rates by 25 bps at the next policy meeting in May and have been pricing in a small chance of another rate hike in June. The bets were reaffirmed by the recent hawkish comments by several Fed officials. Moreover, the incoming macro data from the US pointed to a resilient economy and fueled concerns that the Fed may have more work to do to tame stubbornly high inflation in the US amid easing fears of a full-blown banking crisis.

This further fuel worries about the economic headwinds stemming from rising borrowing costs and tempers investors' appetite for riskier assets., which is evident from a generally weaker tone around the equity markets. The anti-risk lends additional support to the safe-haven Greenback and weighs on the GBP/USD pair. That said, the stronger UK inflation figures released on Wednesday should keep pressure on the BoE to raise interest rates further and act as a tailwind for spot prices.

The aforementioned mixed fundamental backdrop makes it prudent to wait for strong follow-through selling before placing aggressive bearish bets around the GBP/USD pair in the absence of any relevant macro data from the UK. The US economic docket features the release of the usual Weekly Initial Jobless Claims, the Philly Fed Manufacturing Index and Existing Home Sales. This, along with the US bond yields and the broader risk sentiment, will drive the USD demand and provide some impetus.

Technical levels to watch