Title: GBP/USD sticks to modest recovery gains above mid-1.1900s, upside potential seems limited

7 July, 2022 7:37AM ET

By: AnalysisWatch

GBP/USD built on the two-year low reached overnight and trended higher on Thursday.

A positive risk tone prompted some profit-taking around the safe-haven USD and extended support.

The UK political crisis and Brexit issues are likely to prove a headwind for the GBP and limit the pair's gains.

The GBP/USD pair gained positive momentum on Thursday, moving further away from its low since March 2020, which was reached in the 1.1875 area the previous day. The pair maintained its uptrend during early European trade and was last seen trading near the day's high just above the 1.1900 level.

A slight improvement in global risk sentiment led to profit-taking in the safe-haven US dollar, especially after the recent strong rally to a two-decade high. This, in turn, lent some support to the GBP/USD pair, although a combination of factors may prevent bulls from making aggressive bets.

Recession fears remain the main theme and are likely to curb any optimistic move in the markets. Apart from that, the expectation of more aggressive rate hikes by the US Federal Reserve should limit the USD pullback. In addition, domestic issues should act as a headwind for sterling and help limit the GBP/USD's upside.

British Prime Minister Boris Johnson is facing increasing pressure to resign following the resignations of key Tory MPs in recent days. This comes amid fears that the British government's controversial Northern Ireland Protocol Bill could trigger a trade war with the European Union, given the ongoing cost-of-living crisis.

Apart from this, the expectation that the Bank of England will gradually raise interest rates supports the prospects of fresh selling in the GBP/USD pair. Therefore, it is advisable to wait for strong follow-through buying before confirming that spot rates have formed a short-term bottom.

Market participants are now looking ahead to US weekly initial jobless claims, which will be released during the early North American session. This, along with scheduled speeches from Fed Governor Christopher Waller and St. Louis Fed President James Bullard, will influence USD rate dynamics and provide some lift to the GBP/USD pair