GBP/USD flirts with daily high amid softer USD, upside potential seems limited

• GBP/USD regained positive traction on Thursday and recovered a part of the overnight slump.
• Retreating US bond yields kept the USD bulls on the defensive, which extended some support.
• Aggressive Fed rate hike bets, the risk-off mood should limit any meaningful slide for the buck.
• Diminishing odds for any further BoE rate hikes might also contribute to cap gains for the pair.

The GBP/USD pair maintained its bid tone through the early part of the European session and was last seen trading near the daily high, around the 1.2375-1.2380 region.

The pair attracted some buying on Thursday and recovered a part of the overnight slump, though any meaningful recovery still seems elusive. A softer tone surrounding the US Treasury bond yields kept the US dollar bulls on the defensive and extended some support to the GBP/USD pair. That said, the risk-off mood, along with the prospects for a more aggressive policy tightening by the Fed, should limit losses for the greenback and cap any further gains for the major.

On the other hand, the British pound was weighed down by looming recession risk and diminishing odds for any further interest rate hikes by the Bank of England. The latest UK consumer inflation figures released on Wednesday, along with a surprise contraction of the economy in March, fueled stagflation fears. Moreover, rising wages threaten to further exacerbate inflationary pressures and hurt consumer spending, forcing investors to scale back BoE rate hike bets.

Market players also seem worried that Britain's push to effectively override parts of the Brexit trade deal for Northern Ireland would inflame tensions with Europe and trigger a trade war in the middle of the cost-of-living crisis. This could further take its toll on the UK economy and validate the BoE's gloomy outlook, which, in turn, should keep a lid on any meaningful upside for the GBP/USD pair. Hence, any subsequent move up would still be seen as a selling opportunity.

Traders now look forward to the US economic docket, featuring the release of the Philly Fed Manufacturing Index, the usual Weekly Initial Jobless Claims and Existing Home Sales data later during the early North American session. Apart from this, the US bond yields and the broader market risk sentiment will influence the USD price dynamics. This, along with the incoming Brexit-related headlines, should provide a fresh impetus to the GBP/USD pair.

Technical levels to watch