GBP/USD clings to modest recovery gains, lacks bullish conviction.

• GBP/USD makes a nice recovery from below the 1.3000 level and breaks a four-day losing streak.
• Modest profit-taking around the USD turns out to be a key factor offering GBP/USD support.
• The Fed’s dovish outlook and high US bond yields should limit USD losses and limit the pair’s rise.

The pair GBP/USD is giving back some of the initial gains at a daily high of 1.3045 and clings to modest recovery gainsaround the 1.3015 region and still up 0.14% on the day at the start of the European session on Wednesday.

Having shown some resistance below the psychological level of 1.3000, the pair GBP/USD staged an intraday recovery from near the yearly low and was supported by a modest US dollar pullback. The rally allows GBP/USD to break a four-day losing streak, but lacks bullish conviction. The expectations that the Fed will tighten monetary policy at a faster pace to keep inflation in check acted as a tailwind for the USD and capped the pair’s gains.

Markets have been pricing in several 50 basis point rate hikes by the Fed and expectations were bolstered by aggressive comments from several FOMC members. Chicago Fed President Charles Evans said Tuesday that he is comfortable with a round of rate hikes this year that includes two 50 basis point increases. This comment was added to that of Minneapolis Fed President Neel Kakari, one of the more dovish members of the FOMC, who said policymakers they will need to take even more aggressive action to reduce inflation.

This, coupled with inflation fears, pushed the 10-year US government bond yield to a level not seen since late 2018. Investors remain concerned about the worsening of the crisis in Ukraine, which would put further upward pressure on high inflation. This was evident from the prevailing cautious market sentiment, which was seen as another factor benefiting the USD. Hence it is prudent to wait for a continuation of strong buying before confirming that GBP/USD has bottomed out.

There are no major economic data releases from the UK market, while the US economic calendar is . presents the publication of existing home sales. This, along with US bond yields, will influence the USD price dynamics and provide some momentum to the GBP/USD pair. Traders will take cues from developments surrounding the Russian-Ukrainian war, which should boost broader market risk sentiment and help build short-term opportunities around the pair.

GBP/USD technical levels