GBP/USD STICKS TO MODEST RECOVERY GAINS ABOVE 1.2100, UPSIDE POTENTIAL SEEMS LIMITED

• GBP/USD gained positive traction on Monday and moved further away from a multi-week low.
• The recent slump in the US bond yields kept the USD bulls on the defensive and offered support.
• Aggressive Fed rate hike bets, recession fears to limit the USD losses and cap gains for the major.

The GBP/USD pair edged higher on the first day of a new trading week and built on Friday’s late rebound from the 1.1975 region, or the lowest level since June 14. The pair held on to its modest gains through the early European session and was last seen trading near the daily high, just above the 1.2100 mark.

The recent sharp decline in the US Treasury bond yields kept the US dollar bulls on the defensive, which, in turn, offered some support to the GBP/USD pair. That said, the Federal Reserve’s non-stop chatter about rate hikes to curb soaring inflation, along with the prevalent risk-off mood, acted as a tailwind for the safe-haven buck.

Speaking at the ECB Forum in Sintra last Wednesday, Fed Chair Jerome Powell lifted market bets for more aggressive rate hikes and said that the US economy is well-positioned to handle tighter policy. Powell further added that the Fed remains focused on getting inflation under control and that the market pricing is pretty close to the dot plot.

The Fed’s hawkish outlook added to growing market concerns that rapidly rising rates and tightening financial conditions would pose challenges to global economic growth. Adding to this, the ongoing Russia-Ukraine war and a fresh COVID-19 outbreak in China, have stoked fears of a possible recession and continued weighing on investors’ sentiment.

Furthermore, concerns about fresh UK-EU tensions over the Northern Ireland Protocol of the Brexit agreement should hold back traders from placing bullish bets around the British pound. In the latest development, the UK House of Commons last week voted in favour of a bill that would unilaterally overturn part of Britain’s divorce deal from the EU.

Given that the US markets are closed in observance of Independence Day, the fundamental backdrop warrants some caution for aggressive bullish traders. Hence, it will be 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 upside.