GBP/USD sticks to modest gains near mid-1.2500s, upside potential seems limited

• Some cross-driven strength assisted GBP/USD to regain positive traction on Wednesday.
• Diminishing odds for any further BoE rate hikes could act as a headwind amid Brexit woes.
• Modest USD strength could further contribute to capping gains ahead of FOMC minutes.

The GBP/USD pair built on the previous day's late bounce from the 1.2470 region and gained some follow-through traction on Wednesday. The pair held on to its modest intraday gains through the early European session and was last seen trading near the daily high, around mid-1.2500s.

Some cross-driven strength stemming from a dramatic turnaround in the EUR/GBP cross turned out to be a key factor that extended some support to the GBP/USD pair. Apart from this, the uptick lacked any obvious fundamental catalyst and runs the risk of fizzling out rather quickly amid diminishing odds for any further interest rate hikes by the Bank of England.

The flash UK PMIs released on Tuesday showed a sharp deceleration in growth during May and reinforced the BoE's gloomy outlook, warning that Britain is on course to enter a technical recession. This, in turn, suggested that the current rate hike cycle could be nearing a pause, which, along with the UK-EU impasse, should hold back the GBP bulls from placing aggressive bets.

On the other hand, the US dollar made a solid comeback and reversed a major part of the overnight slide to a one-month low. This might further contribute to keeping a lid on any meaningful gains for the GBP/USD pair. The fundamental backdrop seems tilted firmly in favour of bearish traders and suggests that any subsequent move up might still be seen as a selling opportunity.

There isn't any major market-moving data due for release from the UK, while the US economic docket features Durable Goods Orders. The focus, however, will remain glued to the FOMC monetary policy meeting minutes, due for release later during the US session. Investors will look for cues about the possibility of a jumbo 75 bps rate hike in June, which will play a key role in influencing the near-term USD price dynamics and provide a fresh impetus to the GBP/USD pair.

Technical levels to watch