GBP/USD rebounds from multi-week low amid softer USD, lacks bullish conviction

• GBP/USD attracts some buying on Friday amid a modest USD pullback from a two-month high.
• A positive risk tone turns out to be a key factor that prompts some profit-taking around the USD.
• Hawkish Fed expectations and US debt ceiling optimism to limit USD losses ahead of Fed’s Powell.

The GBP/USD pair shows some resilience below the 50-day Simple Moving Average (SMA) and stages a modest recovery from sub-1.2400 levels, or over a three-week low touched the previous day. Spot prices trade with a mildly positive bias, around the 1.2425-1.2430 region, through the first half of the European session, albeit lacks bullish conviction.

The risk-on impulse - as depicted by a further rise in the global equity markets - prompts some profit-taking around the safe-haven US Dollar (USD), which, in turn, is seen as a key factor lending support to the GBP/USD pair. However, expectations that the Federal Reserve (Fed) will keep interest rates higher for longer, along with the latest optimism over the potential of lifting the US debt ceiling, could help limit the downside for the USD. This, in turn, holds back traders from placing aggressive bullish bets 
around the major and caps gains.

In fact, Dallas Fed President Lorie Logan said on Thursday that the economic data points so far don’t justify skipping a rate increase at the next policy meeting in June. This comes on the back of the recent hawkish comments by several Fed officials and forces investors to scale back their bet for rate cuts later this year. Furthermore, top US congressional Republican Kevin McCarthy noted that negotiations are at a better place than last week and expected a bill to raise the government's $31.4 trillion debt ceiling on the House floor next week.  

The British Pound (GBP), on the other hand, continues to be undermined by expectations that fewer rate increases by the Bank of England (BoE) will be needed in the coming months to bring down inflation. The bets were lifted by rather unimpressive UK jobs data released on Tuesday and less hawkish remarks by BoE Governor Andrew Bailey on Wednesday. This further contributes to keeping a lid on the GBP/USD pair in the absence of any relevant market-moving economic data due for release on Friday, either from the UK or the US.

Traders might also prefer to wait on the sidelines ahead of Fed Chair Jerome Powell's speech later during the US session, which will be scrutinized for clues about the next policy move. This, in turn, will play a key role in influencing the near-term USD price dynamics and provide some meaningful impetus to the GBP/USD pair. Nevertheless, spot prices remain on track to end in the red for the second straight week and the aforementioned fundamental backdrop suggests that the path of least resistance is to the downside.

Technical levels to watch