GBP/USD drops to fresh weekly low, holds above mid-1.2500s ahead of BoE

• GBP/USD comes under some bearish pressure on Thursday and retreats further from the YTD peak.
• Resurgent USD demand prompts aggressive selling amid some repositioning trade ahead of the BoE.
• The fundamental backdrop still supports prospects for the emergence of dip-buying at lower levels.

The GBP/USD pair extends the previous day's retracement slide from the 1.2680 region, or its highest level since April 2022 and remains under heavy selling pressure on Thursday. The downward trajectory remains uninterrupted through the early part of the European session and drags spot prices to a fresh weekly low, around the 1.2565 area in the last hour.

The US Dollar (USD) makes a solid comeback following the overnight modest downtick and jumps to over a one-week high, which, in turn, is seen exerting downward pressure on the GBP/USD pair. Despite signs of easing inflationary pressures in the US, traders remain uncertain over the Federal Reserve's (Fed) next policy move. In fact, the current market pricing indicates a greater chance that the US central bank will leave interest rates steady in June. That said, diverging views over the possibility of rate cuts later this year, along with worries about slowing economic growth,  prompt some short-covering around the Greenback.

This, along with some repositioning trade ahead of the highly-anticipated Bank of England (BoE) monetary policy decision, also seems to contribute to the offered tone surrounding the GBP/USD pair. The downside, however, is more likely to remain limited amid expectations that the UK central bank will hike interest rates by another 25 bps later this Thursday. Moreover, economic forecasts published by the National Institute of Economic and Social Research (NIESR) indicated that the underlying inflation in the UK has shown little sign of having peaked. This, in turn, might further hold back traders from placing bearish bets around the British Pound.

Hence, the market focus will be on the post-meeting press conference, where comments by Governor Andrew Bailey will influence the GBP. Later during the early North American session, traders will take cues from the US economic docket, featuring the release of the Producer Price Index (PPI) and the usual Weekly Initial Jobless Claims data. Apart from this, a scheduled speech by Fed Governor Christopher Waller, along with the US bond yields and the broader risk sentiment, will drive the USD and provide some impetus to the GBP/USD pair. Nevertheless, the aforementioned fundamental backdrop warrants some caution for bearish traders.

Technical levels to watch