GBP/USD Approaches 1.2400 Amid Reviving Dollar Demand, Fall Seems Limited

• GBP/USD falls for the third day in a row amid a modest rally in the USD.
• Market caution benefits the safe-haven USD.
• Expectations of an imminent pause in the Fed rate hike could continue to constrain the dollar.

The pair GBP/USD fails to capitalize on the rebound of more than 70 pips from the previous day and attracts new sellers near the 1.2455-1.2460 zone, at the 50-day simple moving average (SMA) on Tuesday. The pair moves lower for the third day in a row and trades just above the round 1.2400 level during the first half of the European session.

The caution prevailing in equity markets offers some support to the safe-haven US dollar (USD), which in turn is seen as a key factor acting as a headwind for GBP/USD. That said, it seems difficult for the dollar to rise significantly in a context of rising expectations for an eventual pause in the Federal Reserve’s monetary policy tightening cycle (Fed). In fact, current market prices point to a greater likelihood that the US central bank will hold interest rates unchanged next week.

It is worth remembering that last week a series of influential Fed officials supported the idea of ​​not raising interest rates at the June monetary policy meeting. Besides, the disappointing release of the US ISM services PMI on Monday., which fell to 50.3 in May, signals further cooling in the US economy and offers less scope for the US central bank to continue raising interest rates. This translates into a further decline in US Treasury yields and acts as a headwind for the dollar.

Apart of this, Expectations that the Bank of England (BoE) will be much more aggressive in tightening monetary policy to contain stubbornly high inflation could further help limit GBP/USD’s downside. This, in turn, suggests that any further decline could still be seen as a buying opportunity and remain limited. In the absence of relevant US economic releases, USD price dynamics will continue to play a key role in influencing the pair’s price action.

GBP/USD technical levels to watch