GBP/USD rebounds from weekly low, upside potential seems limited ahead of FOMC

• GBP/USD staged modest intraday recovery from the weekly low touched on Wednesday.
• A generally positive risk tone undermined the safe-haven USD and extended some support.
• The upside seems limited as investors await the highly-anticipated FOMC policy decision.

The GBP/USD pair quickly reversed an early European session dip to the weekly low and jumped to a fresh daily high, around the 1.2520-1.2525 region in the last hour.

Given that the Fed's anticipated move to hike interest rates is already priced in, a generally positive tone around the equity markets undermined the safe-haven US dollar. This, in turn, was seen as a key factor that assisted the GBP/USD pair to attract some buying near the 1.2465 region on Wednesday, though any meaningful positive move seems elusive.

Investors seem convinced that the US central bank would adopt a more aggressive policy response to curb soaring inflation and lift the benchmark interest rate to around 3.0% by the end of the year. This was reinforced by elevated US Treasury bond yields, which should act as a tailwind for the greenback and keep a lid on the intraday uptick for the GBP/USD pair.

Investors might also refrain from placing aggressive bets and prefer to wait on the sidelines ahead of the highly-anticipated FOMC policy decision, scheduled to be announced later during the US session. The Fed is widely expected to raise interest rates by 50 bps and lay down plans to start shrinking its massive balance sheet at a likely pace of $95 billion a month.

Investors will also scrutinize comments by Fed Chair Jerome Powell for fresh clues about the pace of future policy tightening if the economy weakens. This will play a key role in influencing the near-term USD price dynamics and produce some trading opportunities around the GBP/USD pair ahead of the Bank of England monetary policy meeting on Thursday.

Heading into the key event risk, traders might take cues from the US economic docket, featuring the releases of the ADP report on private-sector employment and the ISM Services PMI. This, along with the broader market risk sentiment, will drive the USD demand and provide some impetus to the GBP/USD pair, though any immediate market reaction is likely to be short-lived.

Technical levels to watch