GBP/USD holds steady around mid-1.2400s, traders seem non-committed on Fed uncertainty

• GBP/USD trades with a mild positive bias and is supported by subdued USD price action.
• The uncertainty over the Fed’s next policy moves keeps the USD bulls on the defensive.
• Bets for additional BoE rate hikes underpin the Sterling and act as a tailwind for the pair.

The GBP/USD pair edges higher during the Asian session on Thursday, albeit remains well below the weekly top, around the 1.2500 psychological mark touched the previous day. The pair is currently placed just below mid-1.2400s, up less than 0.10% for the day, and draws support from subdued US Dollar (USD) price action.

The USD Index (DXY), which tracks the Greenback against a basket of currencies, continues with its struggle to gain any meaningful traction in the wake of the uncertainty over the Federal Reserve's (Fed) next policy move. Last week's dovish rhetoric by several Fed officials lifted bets for an imminent pause in the US central bank's policy tightening cycle. Last week's dovish rhetoric by several Fed officials lifted bets for an imminent pause in the US central bank's policy tightening cycle.

This, in turn, remains supportive of elevated US Treasury bond yields and should act as a tailwind for the USD. In fact, the yield on the benchmark 10-year US government bond holds steady near the monthly peak touched on Wednesday, which might hold back traders from placing aggressive bearish bets around the buck and cap any meaningful gains for the GBP/USD pair. The downside, however, seems limited on the back of expectations for further policy tightening by the Bank of England (BoE).

Investors now seem convinced that the UK central bank will be far more aggressive in policy tightening to contain stubbornly high inflation and expect another 25 bps lift-off on June 22. Furthermore, market participants see a roughly 60% chance that rates will peak at 5.5% later this year. The bets were reaffirmed by the official consumer inflation data, which showed that the headline UK CPI fell less than expected in April and a closely watched measure of core price surged to a 31-year high.

Moving ahead, there isn't any relevant market-moving economic data due for release from the UK on Thursday, leaving the GBP/USD pair at the mercy of the USD price dynamics. Later during the North American session, traders will take cues from the Weekly Initial Jobless Claims data. Apart from this, the US bond yields will drive the USD and provide some impetus to the major. Nevertheless, the mixed fundamental backdrop warrants caution before placing fresh directional bets.

Technical levels to watch