GBP/USD sticks to modest recovery gains above mid-1.1900s, upside potential seems limited

• GBP/USD built on the overnight bounce from over a two-year low and edged higher on Thursday.
• A positive risk tone prompted some profit-taking around the safe-haven USD and extended support.
• The UK political crisis, Brexit woes should act as a headwind for the GBP and cap gains for the pair.

The GBP/USD pair gained some positive traction on Thursday and moved further away from its lowest level since March 2020, around the 1.1875 region touched the previous day. The pair maintained its bid tone through the early European session and was last seen trading near the daily high, just above the mid-1.1900s.

A slight improvement in global risk sentiment prompted some profit-taking by traders of the safe-haven US dollar, especially after the recent strong bullish run to a two-decade high. This, in turn, extended some support to the GBP/USD pair, though a combination of factors might hold back bulls from placing aggressive bets.

Recession fears remain the key theme and should keep a lid on any optimistic move in the markets. Apart from this, expectations for more aggressive Fed rate hikes should limit the USD pullback. Furthermore, domestic issues should act as a headwind for the British pound and contribute to capping the upside for the GBP/USD pair.

British Prime Minister Boris Johnson faces mounting pressure to step down following the resignations of key Tory MPs over the past few days. This comes amid worries that the UK government's controversial Northern Ireland Protocol Bill could trigger a trade war with the European Union amid the ongoing cost of living crisis.

Apart from this, expectations that the Bank of England would adopt a gradual approach towards raising interest rates supports prospects for the emergence of fresh selling around the GBP/USD pair. This makes it prudent to wait for strong follow-through buying before confirming that spot prices have formed a near-term bottom.

Market participants now look forward to the US Weekly Initial Jobless Claims, due later during the early North American session. This, along with Fed Governor Christopher Waller and St. Louis Fed President James Bullard's scheduled speeches, will influence the USD price dynamics and provide some impetus to the GBP/USD pair.

Technical levels to watch