GBP/USD bears flirt with daily low, just above 1.2100 mark amid stronger USD

• GBP/USD witnessed heavy selling on Friday amid a strong pickup in the USD demand.
• The uncertainty over the size of the Fed rate hike prompts some USD short-covering.
• The BoE’s gloomy economic outlook undermines the GBP and contributes to the slide.

The GBP/USD pair comes under renewed selling pressure on Friday and drops to the 1.2100 neighbourhood during the early North American session.

The US dollar makes a solid comeback on the last day of the week and moves away from its lowest level since late June touched the previous day. This turns out to be a key factor exerting downward pressure on the GBP/USD pair, which fails to benefit from mostly better-than-expected UK macroeconomic releases.

The Preliminary GDP report, however, showed that the UK economy contracted by 0.1% in Q2 as compared to the 0.8% rise in the previous quarter. The dismal figure validates the Bank of England's outlook that a prolonged recession would start in the fourth quarter and acts as a headwind for the British pound.

The USD, on the other hand, witnesses a short-covering move amid the uncertainty over the size of the next rate hike by the Federal Reserve. Data released this week showed signs of easing inflationary pressures in the US and forced investors to trim bets for a 75 bps Fed rate hike move in the September meeting.

That said, the recent hawkish comments by several Fed officials suggest that the US central bank would stick to its policy tightening path. This, in turn, prompts traders to lighten their USD bearish bets, though a combination of factors could cap gains and help limit the downside for the GBP/USD pair.

Nevertheless, spot prices reverse a major part of the weekly gains and remain at the mercy of the USD price dynamics. Next on tap would be the release of the Preliminary Michigan US Consumer Sentiment Index, which might influence the buck and produce some trading opportunities around the GBP/USD pair.

Technical levels to watch