GBP/USD jumps to multi-day high, eyes 1.2300 mark amid fresh USD selling

• GBP/USD caught aggressive bids and rallied to a three-day high in the last hour.
• Softer US macro data weighed on the USD and prompted a short-covering move.
• Elevated US bond yields, the risk-off mood to limit the USD losses and cap the pair.

The GBP/USD pair witnessed a short-covering bounce on Thursday and rallied nearly 150 pips from the 1.2040 area, or the daily low touched in the aftermath of the Bank of England policy decision. The momentum pushed spot prices to a three-day high, around the 1.2280-1.2285 region during the early North American session.

The intraday US dollar positive move lost steam following the disappointing release of the US macro data, which, in turn, was seen as a key factor that offered support to the GBP/USD pair. The US Department of Commerce reported that Housing Starts declined by 14.4% and Building Permits fell by 7% in May. Adding to this, the Federal Reserve Bank of Philadelphia's Manufacturing Business Outlook Survey's diffusion index for current general activity declined to -3.3 in June from 2.5 in May. The data added to worries about softening US economic growth and prompted some selling around the greenback.

That said, elevated US Treasury bond yields, bolstered by hawkish Fed expectations, should help limit any deeper USD pullback. Fed Chair Jerome Powell said on Wednesday the US central bank is “absolutely determined” to keep inflation expectations anchored to 2% and reaffirmed another big hike in July. Moreover, the so-called dot plot showed that the median year-end projection for the federal funds rate moved up to 3.4% from 1.9% in the March estimate and 3.8% in 2023. This, along with the risk-off impulse, could lend support to the safe-haven buck and cap the GBP/USD pair, at least for now.

Apart from this, expectations that the BoE would opt for a more gradual approach to raising interest rates amid recession fears could act as a headwind for the British pound. Bulls might also be reluctant to place aggressive bets amid the UK-EU impasse over the Northern Ireland Protocol of the Brexit agreement. The fundamental backdrop favours bearish traders, suggesting that any subsequent move up runs the risk of fizzling out rather quickly. Hence, it will be prudent to wait for strong follow-through buying before confirming that the GBP/USD pair has formed a near-term bottom.

Technical levels to watch