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Title: GBP/USD sticks to modest gains around mid-1.2000s, upside seems limited ahead of FOMC

July 27, 2022 03:55 AM ET

By: AnalysisWatch

The GBP/USD pair saw fresh buying offers on Wednesday, building on the previous day's slight recovery from the support zone between 1.1965 and 1.1960. However, the pair fell back a few points from the day's high and traded around the 1.2000 level in early European trading, still gaining over 0.20% on the day.

The U.S. dollar's ability to capitalize on the sharp overnight rise was undermined by expectations that an economic downturn would force the Fed to reduce the pace of its monetary tightening. Apart from that, a modest recovery in equity markets weakened the safe-haven greenback, which in turn provided some support to the GBP/USD currency pair.

The British pound received additional support from rising bets on a 50 basis-point interest rate hike by the Bank of England at its upcoming August meeting. Still, the UK's political and Brexit issues could act as a headwind for the GBP/USD pair. Investors may also prefer to wait for the outcome of the two-day FOMC monetary policy meeting.

The Fed is widely expected to raise interest rates by 75 basis points to curb rapidly rising inflation.

However, market participants remain divided on the need for more aggressive rate hikes in light of the deteriorating economic outlook and growing recession fears.

Therefore, investors will be closely watching Fed Chairman Jerome Powell's remarks at the post-meeting press conference for fresh clues on the near-term policy outlook. This, in turn, would have a decisive impact on the near-term USD rate dynamics and help determine the next leg of a change in direction for the GBP/USD pair.

While looking at the risk of key central bank events, traders will be paying attention to the US economic data, especially the durable goods orders released during the early North American session. This, along with the general risk sentiment in the market, could boost USD demand and create short-term opportunities for the GBP/USD pair.

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