GBP/USD clings to modest gains, bulls await a move beyond 1.3800

• GBP/USD gained some positive traction on Friday, though lacked follow-through.
• BoE rate hike expectations underpinned the sterling and extended some support.
• A combination of factors helped revive the USD demand and capped the upside.

The GBP/USD pair traded with a mild positive bias through the early European session, with bulls awaiting a sustained move beyond the 1.3800 mark.

Following the previous day's failure ahead of the 1.3820-25 resistance zone, the GBP/USD pair regained traction on Friday and is now looking to build on this week's recovery from the 1.3700 neighbourhood. That said, a goodish pickup in the US dollar demand, bolstered by a combination of factors, acted as a headwind for the major.

As investors looked past Thursday's dismal US GDP print, the greenback drew some support from a strong follow-through uptick in the US Treasury bond yields and the cautious market mood. The yield on the benchmark 10-year US government bond shot back above the 1.60% mark amid prospects for an early policy tightening by the Fed.

The markets seem convinced that the Fed would be forced to adopt a more aggressive policy response to contain stubbornly high inflation. This, along with signs of a global economic slowdown, has been fueling worries about the risk of stagflation and weighed on investors' sentiment, lending some support to the safe-haven USD.

On the other hand, the British pound was undermined by Brexit jitters, though expectations for an imminent Bank of England rate hike move helped limit losses. In the latest Brexit-related developments, the UK Prime Minister said that conditions had been met to invoke Article 16 unless they see rapid progress on the Northern Ireland protocol.

This comes on the back of a row over the post-Brexit fishing rights between the UK and France, which could hold bullish traders from placing aggressive bets around the GBP/USD pair. Moreover, repeated pullbacks from the 1.3820-25 supply zone make it prudent to wait for a strong follow-through buying before positioning for any further gains.

Friday's key highlight will be the release of the US Core PCE Price Index, which will set the tone heading into next week's key central bank meetings – BoE and FOMC. Apart from this, the US bond yields and the broader market risk sentiment will influence the USD price dynamics and provide some impetus to the GBP/USD pair.

Technical levels to watch