GBP/USD holds steady around 1.1700 amid softer USD, upside potential seems limited

• GBP/USD remains confined in a narrow trading band and oscillates around the 1.1700 mark.
• Retreating US bond yields, a positive risk tone undermines the USD and offers some support.
• Aggressive Fed rate hike bets limit the USD losses and seem to cap the upside for the pair.
• A bleak outlook for the UK economy supports prospects for a further depreciating move.

The GBP/USD pair extends its sideways price move for the second successive day on Tuesday and remains confined in a range around the 1.1700 mark through the early European session. A subdued US dollar demand offers some support to spot prices, though a combination of factors seems to cap the upside.

In fact, the USD languishes below a 20-year high touched the previous day amid a further pullback in the US Treasury bond yields. Adding to this, a goodish recovery in the equity markets undermines the safe-haven buck and acts as a tailwind for the GBP/USD pair. That said, expectations for a more aggressive policy tightening by the Fed should help limit any deeper USD losses.

The current market pricing indicates a greater chance of a supersized 75 bps rate hike at the September FOMC policy meeting. The bets were reaffirmed by more hawkish remarks by Fed Chair Jerome Powell on Friday, signalling that interest rates would be kept higher for longer to bring down inflation. Apart from this, a bleak outlook for the UK economy keeps a lid on the GBP/USD pair.

It is worth recalling that the Bank of England had predicted earlier this month that the UK economy will enter a prolonged recession from the fourth quarter of 2022. This, in turn, suggests that the path of least resistance for the GBP/USD pair is to the downside and the attempted recovery from the 1.1650 area, or the lowest level since March 2020 runs the risk of fizzling out rather quickly.

In the absence of any major market-moving economic releases, the USD price dynamics should continue to play a key role in influencing the GBP/USD pair's intraday momentum. Later during the early North American session, the US economic docket - featuring JOLTS Job Openings data and the Conference Board's Consumer Confidence Index - might allow traders to grab short-term opportunities.

Technical levels to watch