GBP/USD recovers early lost ground, flat-lined around mid-1.3500s amid modest USD pullback

• GBP/USD attracted dip-buying on Friday and reversed a dip back closer to the weekly low.
• Retreating US bond yields kept a lid on the USD gains and acted as a tailwind for the major.
• Rising bets for a 50 bps Fed rate hike in March should underpin the USD and cap the upside.

The GBP/USD pair recovered its early lost ground and was last seen trading in the neutral territory, around mid-1.3500s.

The pair witnessed some selling during the first half of the trading on Friday and dropped to the lower end of its weekly trading range amid a strong follow-through US dollar buying. Expectations that the Fed will tighten its monetary policy at a faster pace to combat high inflation continued acting as a tailwind for the greenback and exerted pressure on the GBP/USD pair.

The red-hot US consumer inflation figures released on Thursday reinforced market bets for a 50 bps Fed rate hike move in March. St. Louis Fed President James Bullard added to market speculations and called for 100 bps rate hikes over the next three FOMC policy meetings. This, along with a generally weaker tone around the equity markets, underpinned the safe-haven greenback.

The GBP/USD pair had a rather muted reaction to the release of mixed UK macro data, which showed that the economy expanded by 1% during the fourth quarter of 2021 as against 1.1% anticipated. Separately, the UK Industrial/Manufacturing Production and a larger than estimated traded deficit did little to impress bullish traders or provide any impetus to the GBP/USD pair.

That said, retreating US Treasury bond yields capped gains for the greenback and once again assisted the GBP/USD pair to attract some buying ahead of the 1.3500 psychological mark. The said handle should act as a pivotal point for short-term traders, which if broken decisively will set the stage for an extension of the previous day's sharp pullback from a three-week high.

Market participants now look forward to the US economic docket, featuring the release of the Prelim University of Michigan US Consumer Sentiment Index. This, along with the US bond yields and the broader market risk sentiment, will influence the USD price dynamics and produce some short-term trading opportunities around the GBP/USD pair.

Technical levels to watch