GBP/USD inches back closer to weekly high amid weaker USD, lacks follow-through

• GBP/USD catches fresh bids on Thursday and climbs back closer to the weekly high.
• The risk-on impulse undermines the safe-haven USD and offers support to the major.
• Hawkish Fed expectations, recession fears to limit the USD losses and cap the upside.

The GBP/USD pair regains positive traction on Thursday and is looking to build on its recovery from the 1.1715 area, or the lowest level since March 20 touched earlier this week. The pair steadily climbs back above the mid-1.1800s, closer to the weekly high, and is supported by the emergence of fresh selling around the US dollar.

The risk-on impulse - as depicted by a generally positive tone around the equity markets - turns out to be a key factor weighing on the safe-haven greenback. The market sentiment gets a lift on Thursday after China announced a stimulus package worth one trillion yuan ($146 billion) - roughly 1% of its overall GDP - to shore up its economy. This, along with some repositioning trade ahead of the Jackson Hole Symposium, drags the USD Index, which measures the greenback's performance against a basket of currencies, to a fresh weekly low.

That said, worries about a global economic downturn - amid headwinds stemming from China's COVID-19 lockdowns and energy crisis in Europe - should keep a lid on any optimism in the markets. Furthermore, growing acceptance that the Fed will stick to its policy tightening path to tame inflation should limit any meaningful downside for the greenback. In fact, the markets are pricing in at least a 50 bps rate hike at the September FOMC meeting and the bets were reaffirmed by the recent hawkish remarks by several Fed officials.

The market expectations are reaffirmed by elevated US Treasury bond yields, holding steady near a two-month high, which, in turn, favours the USD bulls. Apart from this, the UK's bleak economic outlook should act as a headwind for the British pound and cap gains for the GBP/USD pair. It is worth recalling that the Bank of England earlier this month indicated that a prolonged recession would start in the fourth quarter. This warrants caution for aggressive bullish traders and before positioning for any further appreciating move.

Market participants now look forward to the US economic docket - featuring the release of the Prelim, or the second estimate of Q2 GDP print and Weekly Initial Jobless Claims. This, along with the US bond yields and the broader risk sentiment, might influence the USD price dynamics and provide some impetus to the GBP/USD pair. The focus, however, will remain glued to Fed Chair Jerome Powell's speech at the Jackson Hole Symposium on Friday.

Technical levels to watch