GBP/USD corrects back closer to mid-1.2000s amid modest USD recovery

• GBP/USD retreats from a multi-month high amid a modest pickup in the USD demand.
• An uptick in the US bond yields prompts some USD short-covering amid thin trading.
• Bets for less aggressive Fed rate hikes might cap the buck and lend support to the pair.

The GBP/USD pair edges lower on Friday and moves away from its highest level since August 12, around the 1.2150-1.2155 region touched on Thursday. The pair remains on the defensive through the early North American session and is currently placed near the daily low, around the 1.2065-1.2060 region.

As investors digest Wednesday's dovish FOMC meeting minutes, the US Dollar attracts some buyers on the last day of the week and acts as a headwind for the GBP/USD pair. A modest uptick in the US Treasury bond yields turns out to be a key factor prompting some short-covering around the buck amid relatively thin trading conditions. Apart from this, the attempted USD recovery lacks any obvious fundamental catalyst and runs the risk of fizzling out rather quickly.

Investors seem convinced that the Federal Reserve will slow the pace of its policy tightening and have now fully priced in a relatively smaller 50 bps rate hike at the December meeting. This is likely to act as a headwind for the US bond yields. apart from this, a generally positive risk tone might further contribute to capping the upside for the safe-haven greenback. This, in turn, should lend some support to the GBP/USD pair and help limit deeper losses.

Furthermore, firming expectations that the Bank of England will continue to raise borrowing costs to combat stubbornly high inflation. This might underpin the British Pound and supports prospects for the emergence of some dip-buying around the GBP/USD pair. In the absence of any relevant economic data, the fundamental backdrop warrants caution before positioning for any further slide. Nevertheless, spot prices remain on track to post gains for the third straight week.

Technical levels to watch