GBP/USD consolidates near multi-month low, holds above mid-1.2500s on subdued USD demand

• GBP/USD oscillates in a range just above its lowest level since June 13 touched on Tuesday.
• The USD consolidates its recent gains to a multi-month peak and lends support to the major.
• Bets for more BoE rate hikes act as a tailwind, though looming recession risks cap the upside.
• The BoE’s Monetary Policy Report Hearings eyed for some impetus ahead of US ISM PMI.

The GBP/USD pair struggles to capitalize on the overnight modest bounce from the 1.2530-1.2525 region, or its lowest level since June 13 and oscillates in a narrow trading band through the Asian session on Wednesday. Spot prices currently hover around the 1.2570 region, up less than 0.10% for the day, and remain at the mercy of the US Dollar (USD) price dynamics.

The USD Index (DXY), which tracks the Greenback against a basket of currencies, consolidate its recent move up to a nearly six-month top, which, in turn, is seen as a key factor acting as a tailwind for the GBP/USD pair. Apart from this, expectations that the Bank of England (BoE) will continue with its policy tightening cycle to combat high inflation lends some support to the British Pound (GBP). In fact, money market futures indicate over 85% chance that the BoE will hike interest rates by 25 bps, for the fifteenth time in September.

That said, looming recession risks might hold back traders from placing aggressive bullish bets around the GBP. Furthermore, growing acceptance that the Federal Reserve (Fed) will keep interest rates higher for longer should continue to act as a tailwind for the Greenback and contribute to limiting the upside for the GBP/USD pair. In fact, the markets are still pricing in the possibility of one more 25 bps Fed rate hike move by the end of this year, which remains supportive of elevated US Treasury bond yields and favours the USD bulls.

The aforementioned fundamental backdrop suggests that the path of least resistance for the GBP/USD pair is to the downside and any attempted recovery might still be seen as a selling opportunity. Market participants now look to the BoE Monetary Policy Report Hearings, where comments by Governor Andrew Bailey and several MPC members should influence the Sterling Pound. Later during the early North American session, traders will take cues from the US ISM Services PMI to grab short-term opportunities around the pair.

Technical levels to watch