GBP/USD eases from daily high, struggles to find acceptance above 1.2300 mark

• GBP/USD gained some positive traction on Friday amid modest USD weakness.
• Dovish BoE expectations, Brexit woes acted as a headwind for the British pound.
• Aggressive Fed rate hike bets should help limit the USD losses and cap the upside.

The GBP/USD pair built on the previous day's bounce from the vicinity of the weekly low, around the 1.2170-1.2160 area and gained some positive traction on Friday. The pair maintained its bid tone through the early North American session, though seemed to struggle to capitalize on the move or find acceptance above the 1.2300 round-figure mark.

Some cross-driven strength stemming from the ongoing retracement slide in the EUR/GBP cross, from over a one-week high touched on Thursday, acted as a tailwind for the British pound. On the other hand, the risk-on impulse undermined the safe-haven US dollar, which, to a larger extent, helped offset dismal UK data and offered some support to the GBP/USD pair.

The UK Office for National Statistics reported this Friday that the headlines Retail Sales contracted by 0.5% MoM in May as against the 1.4% growth recorded in the previous month. The core retail sales, stripping the auto motor fuel also decelerated sharply and fell 0.7% MoM from the 1.4% in April, raising concerns over the British economic growth.

The incoming softer UK economic data further fueled recession fears and reaffirmed market bets that the Bank of England would opt for a more gradual approach toward raising interest rates. In contrast, the Federal Reserve is expected to stick to its aggressive policy tightening path and deliver another 75 bps rate hike at its next policy meeting in July.

Fed Chair Jerome Powell, during his second day of Congressional testimony on Thursday, reinforced bets and stressed an unconditional commitment to taming inflation, even amid risks to growth. This might limit the USD losses, which, along with the UK-EU impasse over the Northern Ireland Protocol of the Brexit agreement should cap gains for the GBP/USD pair.

Hence, it will be prudent to wait for strong follow-through buying beyond the weekly high, around the 1.2325 region, before positioning for any further appreciating move. Market participants now look forward to the US economic docket, featuring the release of the revised Michigan Consumer Sentiment Index and New Home Sales data, which might provide some impetus to the GBP/USD pair.

Technical levels to watch