GBP/USD sticks to intraday gains amid modest USD weakness, upside seems limited

• GBP/USD kicks off the new week on a positive note and draws support from a weaker USD.
• The Fed’s hawkish outlook should help limit any meaningful downside for the Greenback.
• Worries that the BoE’s aggressive rate hike could cause economic damage cap the major.

The GBP/USD pair attracts some buyers on the first day of a new week and reverses a major part of Friday's slide to sub-1.2700 levels, stalling its recent corrective decline from a 14-month peak. Spot prices currently trade around the 1.2730-1.2735 region, up 0.15% for the day, any meaningful appreciating move seems elusive.

The US Dollar (USD) struggles to capitalize on its recovery gains registered over the past two days, from the lowest level since May 11 touched last Thursday and meets with some support on the first day of a new week. This, in turn, is seen as a key factor lending some support to the GBP/USD pair. The S&P Global reported on Friday that business activity in the US fell to a three-month low in June as services growth eased for the first time this year and the contraction in the manufacturing sector deepened. This, along with a modest downtick in the US Treasury bond yields and a positive tone around the US equity markets, seem to undermine the safe-haven Greenback.

That said, the Federal Reserve's (Fed) hawkish outlook could act as a tailwind for the buck and cap the GBP/USD pair, at least for now. It is worth recalling that the Fed earlier this month, although decided to pause its year-long rate-hiking cycle, signalled that borrowing costs may still need to rise as much as 50 bps by the end of this year. Furthermore, Fed Chair Jerome Powell reiterated that the central bank will likely raise interest rates again this year, albeit at a "careful pace", to contain high inflation. Powell added that the Fed doesn't see rate cuts happening any time soon and is going to wait until it is confident that inflation is moving down to the 2% target.

Hence, the market focus now shifts to this week's release of the US Core PCE Price Index - the Fed's preferred inflation gauge on Friday. The data might influence market expectations about the Fed's next policy move, which, in turn, will drive the USD demand and provide a fresh directional impetus to the GBP/USD pair. In the meantime, worries about economic headwinds stemming from a more aggressive policy tightening by the Bank of England (BoE) might hold back traders from placing bullish bets around the British Pound. In the absence of any relevant market-moving macro data, either from the UK or the US, this might further contribute to keeping a lid on spot prices.

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