GBP/USD moves away from multi-month low as USD bulls take a brief pause; seems vulnerable

• GBP/USD builds on the overnight bounce from a multi-month low and edges higher on Thursday.
• The USD take a brief pause after rising to a fresh YTD peak and lends some support to the major.
• The divergence Fed-BoE policy outlook might continue to act as a headwind and cap the upside.

The GBP/USD pair ticks higher during the Asian session on Thursday and moves away from its lowest level since March 17, around the 1.2110 region touched the previous day. Spot prices, however, remain below mid-1.2100s and seem vulnerable to prolonging the well-established downtrend witnessed over the past two months or so.

The US Dollar (USD) pauses following the recent strong runup to a 10-month high and turns out to be a key factor lending some support to the GBP/USD pair. The near-term bias, meanwhile, seems tilted firmly in favour of the USD bulls in the wake of growing acceptance that the Federal Reserve (Fed) will continue to tighten its monetary policy further and keep interest rates higher for longer. The bets were reaffirmed by the overnight hawkish comments by Minneapolis Fed President Neel Kashkari, saying that it is not clear yet whether the central bank is finished raising rates amid ample evidence of ongoing economic strength.

Adding to this, the better-than-expected release of the US Durable Goods Orders prompted some economists to raise the third-quarter GDP growth estimates and lifted bets for at least one more Fed rate hike move by the end of this year. This led to an extended selloff in the US fixed-income market, pushing the yield on the benchmark 10-year US government bond to a fresh 16-year peak, further beyond the 4.50% threshold, which continues to underpin the Greenback. That said, extremely overbought conditions hold back the USD bulls from placing fresh bets and act as a tailwind for the GBP/USD pair, though any meaningful recovery seems elusive.

The Bank of England (BoE) surprisingly paused its interest rate hiking cycle and also provided little evidence of it intends to raise rates any further. This marks a divergence in comparison to the Fd's hawkish outlook, which, in turn, suggests that the path of least resistance for the GBP/USD pair is to the upside. Hence, any subsequent move up might be seen as a selling opportunity and runs the risk of fizzling out rather quickly. Traders now look to the release of the final US Q2 GDP print, due later during the early North American session. This, along with the US bond yields, will influence the USD and provide some impetus to the GBP/USD pair.

Technical levels to watch