GBP/USD trades with modest losses below 1.2500 mark, downside potential seems limited

• GBP/USD edges lower for the second straight day, though lacks follow-through selling.
• The USD reverses an intraday dip and turns out to be a key factor acting as a headwind.
• Bets for another 25 bps BoE rate hike in May underpin the GBP and limit the downside.

The GBP/USD pair turns lower for the second successive day on Tuesday and weakens further below the 1.2500 psychological mark during the first half of the European session.

The US Dollar (USD) attracts some dip-buying and stands tall near a two-week high touched on Monday, which, in turn, is seen as a key factor exerting downward pressure on the GBP/USD pair. Expectations that the Federal Reserve (Fed) will hike interest rates by 25 bps at the end of the two-day FOMC policy meeting on Wednesday led to the overnight rise in the US Treasury bond yields. Apart from this, a softer risk tone - amid looming recession risks - lends additional support to the safe-haven Greenback.

The markets, meanwhile, seem convinced that the US central bank will signal a pause in its rate-hiking cycle. This might hold back the USD bulls from placing aggressive bets. Moreover, the Bank of England (BoE) is also expected to deliver a 25 bps lift-off in May, which might further contribute to limiting the downside for the GBP/USD pair. Hence, it will be prudent to wait for strong follow-through selling before positioning for an extension of the recent pullback from the highest level since June 2022.

On the economic data front, the UK Manufacturing PMI is revised higher and finalized at 47.8 for April as compared to the 46.6 estimated in the flash reading. This, however, does little to impress traders or provide any meaningful impetus to the GBP/USD pair. The US economic docket, meanwhile, features the release of JOLTS Job Openings data. This, along with the US bond yields and the broader risk sentiment, will drive the USD demand and produce short-term trading opportunities around the major.

The focus, however, will remain glued to the highly-anticipated FOMC policy decision, scheduled to be announced during the US session on Wednesday. The market attention will then shift to the closely-watched US monthly employment details, popularly known as the NFP report. This will play a key role in influencing the near-term USD price dynamics and help determine the next leg of a directional move for the GBP/USD pair.

Technical levels to watch