GBP/USD Shows Modest Recovery Around 1.2420-25, But Uncertainty Lingers

The GBP/USD currency pair has displayed resilience, maintaining a foothold below the critical 1.2400 level for the second consecutive day. During the Asian session on Friday, it garnered some buying interest after having recently plumbed a three-month low. As of the moment, it hovers around the 1.2420-1.2425 region, reflecting a modest 0.10% uptick for the day. Despite this slight recovery, a robust bounce back still appears elusive.

The recent retreat in the US Dollar (USD) has bolstered the GBP/USD pair. USD bulls have chosen to pocket some profits following a recent surge that took the greenback to its highest level since March 9. This development, in turn, lends support to the GBP/USD.

The market sentiment is buoyed by optimism surrounding further stimulus measures from China, with encouraging Chinese macroeconomic data fostering confidence among investors. Consequently, this has led to some selling pressure on the safe-haven US Dollar. Moreover, a modest decline in US Treasury bond yields has further undercut the USD’s strength.

Nonetheless, expectations that the Federal Reserve (Fed) will maintain its hawkish stance are likely to cap any significant downside for the USD. The central bank is widely anticipated to pause its interest rate hikes at the upcoming meeting next week. However, traders are still pricing in the possibility of one more 25 basis point rate hike either in November or December. This outlook is supported by better-than-expected US economic releases on Thursday, in addition to persistently elevated inflation levels. Consequently, the Fed is expected to keep interest rates at elevated levels for an extended period. This outlook should boost US bond yields, favoring USD bulls.

Furthermore, the GBP/USD pair faces headwinds in the form of reduced odds for a more aggressive monetary policy tightening by the Bank of England (BoE). Recent economic data from the Office for National Statistics reveals that the UK economy contracted by 0.5% in July, raising concerns about a potential recession. Additionally, indications of a cooling UK labor market put pressure on the BoE to halt its interest rate hike cycle.

Technically, the GBP/USD pair suffered a significant blow as it broke and closed below the crucial 200-day Simple Moving Average (SMA), suggesting a prevailing bearish sentiment. Consequently, any upward moves may be viewed as selling opportunities, and they could rapidly lose momentum.

Looking ahead, traders will be monitoring the BoE’s survey on Consumer Inflation Expectations for potential market-moving developments. Additionally, during the early North American session, the US economic calendar will feature the Empire State Manufacturing Index and Preliminary Michigan Consumer Sentiment Index, which could influence USD price dynamics.

Despite these upcoming events, the GBP/USD pair appears set to conclude its second consecutive week in the red. The overall fundamental backdrop seems tilted in favor of bearish traders, suggesting that downward pressure on the pair may persist.