GBP/USD sticks to modest intraday gains, lacks follow-through beyond mid-1.3100s

• GBP/USD edged higher for the third straight day on Thursday amid modest USD weakness.
• Better-than-expected UK macro releases extended additional support to the British pound.
• Fed rate expectations, BoE’s dovish outlook warrants caution for aggressive bullish traders.

The emergence of some USD selling during the early European session pushed the GBP/USD pair back closer to the mid-1.3100s in the last hour, though the uptick lacked bullish conviction.

Following the previous day's pullback from the 1.3180-1.3185 region, the GBP/USD pair attracted some buying near the 1.3110 area on Thursday and turned positive for the third successive day. The US dollar languished near the two-week low amid the ongoing retracement slide and was seen as a key factor that extended some support to the GBP/USD pair.

The British pound was further underpinned by better-than-expected UK macro data, showing that the economy expanded by 1.3% during the final quarter of 2021 as against the 1% estimated previously. Adding to this, the UK Current Account deficit fell sharply to £7.3 billion in Q4 2021 from the upwardly revised reading of £28.9 billion in the previous quarter.

That said, a combination of factors helped limit any deeper USD losses and capped the upside for the GBP/USD pair, at least for now. The incoming geopolitical headlines dashed hopes for a diplomatic solution to end the war in Ukraine. This, along with the growing prospect of new Western sanctions against Russia, extended some support to the safe-haven buck.

In the latest developments surrounding the Russia-Ukraine saga, a Kremlin spokesperson said on Wednesday that they have not noticed anything that looks like a breakthrough in negotiations. Moreover, an adviser to Ukraine’s President noted that Russia is transferring forces from Kyiv to encircle troops and launch  attacks 
in the eastern part of the country.

Apart from this, expectations that the Fed will adopt a more aggressive policy stance to combat high inflation favour the USD bulls. In fact, the markets have been pricing in a 50 bps rate hike move at the next two meetings. Conversely, the Bank of England has softened its tone on the need for further rate hikes. This, in turn, should keep a lid on the GBP/USD pair.

Market participants now look forward to the US economic docket, highlighting the release of the Core PCE Price Index - the Fed's preferred inflation gauge. The focus, however, will remain on fresh developments surrounding the Russia-Ukraine saga. This, along with the US bond yields, will influence the USD price dynamics and provide some impetus to the GBP/USD pair.

Technical levels to watch