GBP/USD holds steady around mid-1.2200s on subdued USD demand, lacks bullish conviction

• GBP/USD ticks higher during the Asian session on Tuesday, albeit lacks follow-through.
• Retreating US bond yields, a positive risk tone undermines the USD and lends support.
• Expectations that the BoE is done hiking rates keep a lid on further gains for the major.

The GBP/USD pair builds on the previous day's goodish rebound of over 80 pips from the 1.2165-1.2160 area and extends its steady ascent through the Asian session on Tuesday. Spot prices, however, lack bullish conviction, warranting some caution before positioning for an extension of the recent recovery move from the lowest level since mid-March, around the 1.2035 area touched last week.

A combination of factors drags the US Dollar (USD) to a one-and-half-week low, which, in turn, is seen acting as a tailwind for the GBP/USD pair. Relatively subdued US wage growth data released on Friday eased inflationary concerns and could allow the Federal Reserve (Fed) to soften its hawkish stance. Furthermore, Fed officials struck a cautious tone on the need for further rate hikes and led to a further decline in the US Treasury bond yields.

Meanwhile, the initial reaction to military clashes between Israel and the Palestinian Islamist group Hamas turns out to be short-lived in the wake of a slight dovish shift in Fed officials' view. This is evident from a generally positive tone around the equity markets and further undermines the safe-haven buck. That said, expectations that the Bank of England (BoE) will maintain the status quo in November should cap the upside for the GBP/USD pair.

In fact, the UK central bank surprisingly paused its rate-hiking cycle earlier in September and provided little hints of its intention to raise rates. This, in turn, makes it prudent to wait for strong follow-through buying before confirming that the GBP/USD pair has formed a near-term bottom and positioning for any meaningful appreciating move. Moving ahead, there isn't any relevant market-moving economic data due for release from the UK or the US on Tuesday.

Later during the North American session, traders will take cues from speeches by influential FOMC members. Apart from this, the US bond yields and the broader risk sentiment might influence the USD price dynamics, which should allow traders to grab short-term opportunities around the GBP/USD pair. The focus, however, will remain on the FOMC minutes and the US consumer inflation figures, due for release on Wednesday and Thursday, respectively.

Technical levels to watch