GBP/USD Shows Bullish Potential Despite Prevailing Risk-Off Sent

The GBP/USD pair struggled to establish a clear direction on Friday, trading within a narrow range. The US dollar was supported by expectations of further rate hikes by the Federal Reserve (Fed) and a cautious risk sentiment, capping the upside for the pair. Meanwhile, concerns of an impending recession weighed on the British pound (GBP) and favored bearish traders.

The Fed's inclination towards tightening monetary policy pushed the US dollar to a fresh weekly high, creating headwinds for the GBP/USD pair. Minutes from the June FOMC policy meeting revealed strong support for resuming rate hikes due to persistently high inflation. Some members even expressed a preference for raising rates rather than maintaining the pause in June, citing a tight labor market that could drive up wages and inflation. This hawkish stance reinforced market expectations of a 25 basis points rate hike at the upcoming FOMC meeting scheduled for July 25-26. Consequently, US Treasury bond yields experienced a sharp increase overnight.

Furthermore, the prevailing risk-off sentiment in the markets further favored the safe-haven US dollar, limiting any significant upside for the GBP/USD pair. Amid concerns about a global economic downturn and the potential escalation of trade tensions between China and the US, investors remained cautious and preferred safer assets.

Adding to the downward pressure on the GBP/USD pair, there were fears that more aggressive interest rate hikes by the Bank of England (BoE) could push the UK economy into recession. Currently, market pricing reflects the possibility of an additional 130 basis points of tightening by the end of the year. BoE Governor Andrew Bailey recently justified the decision to raise interest rates by a substantial 50 basis points on June 22, suggesting that rates may remain at peak levels for a longer duration than traders anticipate.

Given this fundamental backdrop, traders approached the recent rebound from levels below 1.2600 with caution. Market participants awaited the UK Construction PMI data for potential market impetus, while keeping a close eye on the US economic calendar, which included the ADP report on private-sector employment, Weekly Initial Jobless Claims, ISM Services PMI, and JOLTS Job Openings data. However, the primary focus remained on the highly anticipated US monthly jobs data, commonly referred to as the Non-Farm Payrolls (NFP) report, scheduled for release on Friday.