GBP/USD oscillates in a range around 1.2700 mark, upside potential seems limited

• GBP/USD lacks any firm intraday direction and oscillates in a narrow range on Friday.
• Bets for more Fed rate hikes, a softer risk tone underpins the USD and caps the pair.
• Looming recession risks act as a headwind for the GBP and favours bearish traders.

The GBP/USD pair struggles to gain any meaningful traction and seesaws between tepid gains/minor losses during the Asian session on Thursday. Spot prices, however, manage to defend the 200-hour Simple Moving Average (SMA) and currently trade around the 1.2700 mark, nearly unchanged for the day.

The prospects for further policy tightening by the Federal Reserve (Fed) push the US Dollar (USD) to a fresh weekly high, which, in turn, acts as a headwind for the GBP/USD pair. In fact, minutes from the June FOMC policy meeting released on Wednesday showed that almost all members supported resuming rate hikes as inflation remains unacceptably high. Furthermore, some members were in Favor of raising rates rather than pausing at the June meeting, flagging a very tight labor market that threatens to push wages and inflation higher.

The hawkish outlook reaffirms market bets for a 25 bps lift-off at the upcoming FOMC meeting on July 25-26 and led to the overnight sharp rise in the US Treasury bond yields. Apart from this, a generally weaker risk tone further benefits the safe-haven Greenback and should contribute to keeping a lid on any meaningful upside for the GBP/USD pair. Against the backdrop of worries about a global economic downturn, the risk of a further escalation in a trade conflict between China and the US tempers investors' appetite for perceived riskier assets.

Apart from this, fears that more aggressive interest rate hikes by the Bank of England (BoE) could push the UK economy into recession suggests that the path of least resistance for the GBP/USD pair is to the downside. In fact, the markets are currently pricing in the possibility of a further 130 bps of tightening through to the turn of the year. Moreover, BoE Governor Andrew Bailey last week justified the decision to hike interest rates by a jumbo 50 bps on June 22 and said that rates could remain at peak levels for longer than traders currently expect.

The aforementioned fundamental backdrop warrants some caution before positioning for an extension of the recent bounce from sub-1.2600 levels touched last week. Market participants now look to the UK Construction PMI for some impetus ahead of the US economic docket - featuring the ADP report on private-sector employment, the usual Weekly Initial Jobless Claims, the ISM Services PMI and JOLTS Job Openings data. The focus, however, remains glued to the closely-watched US monthly jobs data - popularly known as the NFP report on Friday.

Technical levels to watch