GBP/USD clings to gains near mid-1.1300s amid softer USD, upside potential seems limited

• GBP/USD edges higher amid modest USD weakness, though lacks follow-through buying.
• Aggressive Fed rate hike bets, elevated US bond yields, recession fears limit the USD losses.
• Concerns about the UK government’s fiscal policy further contribute to capping the major.

The GBP/USD pair builds on the overnight bounce from the 1.1225 region and edges higher on Thursday, though lacks follow-through. The pair sticks to a mildly positive tone through the early European session and is currently placed around mid-1.1300s, up 0.20% for the day.

The US dollar struggles to capitalize on the previous day's solid bounce from a two-week low and meets with a fresh supply, which, in turn, offers some support to the GBP/USD pair. That said, a combination of factors is holding back bullish traders from placing aggressive bets and acting as a headwind for the major.

The USD downtick remains limited amid growing acceptance that the Fed will tighten its monetary policy at a faster pace to curb soaring inflation. The markets have been pricing in another supersized 75 bps Fed rate hike move in November. The bets were reaffirmed by the recent hawkish comments by several Fed officials.

This, in turn, remains supportive of elevated US Treasury bond yields, which, along with concerns about a deeper global economic downturn, continue to lend support to the safe-haven buck. The British pound, on the other hand, is undermined by concerns about the new UK government's fiscal policy amid looming recession risks.

UK Prime Minister Liz Truss defended the tax-cut plan during her at the Conservative Party conference on Wednesday and said that cutting taxes is the right thing to do morally and economically. This could derail the Bank of England's efforts to contain inflation, forcing it to turn more hawkish and creating additional economic headwinds.

The fundamental backdrop warrants some caution for aggressive bullish traders and positioning for an extension of the GBP/USD pair's recent strong recovery from an all-time low. Market participants now look forward to the UK Construction PMI for some impetus ahead of the Weekly Initial Jobless Claims data from the US.

This, along with the US bond yields, the broader market risk sentiment and speeches by influential FOMC members, will drive the USD demand and produce short-term trading opportunities around the GBP/USD pair. The focus, however, remains on Friday's release of the closely-watched US jobs data, popularly known as the NFP report.

Technical levels to watch