GBP/USD sticks to modest intraday gains, lacks follow-through beyond mid-1.3100s

• GBP/USD edged higher for the third straight day on Thursday amid modest USD weakness.
• Better-than-expected UK macro releases extended additional support to the British pound.
• Fed rate expectations, BoE’s dovish outlook warrants caution for aggressive bullish traders.

Although some USD selling emerged during the early European session, the GBP/USD pair was able to move back closer to the mid-1.3100s in the past hour, despite the lack of bullish confidence in the recent upswing.

In response to the previous day's decline from the 1.3180-1.3185 zone, the GBP/USD pair attracted some purchasing at the 1.3110 range on Thursday, and the pair closed in the green for the third day in a row. As part of the continuing retracement decline, the US dollar has been hovering at a two-week low, and it is widely seen to be a crucial component in extending some support to the GBP/USD pair.

The British pound was further supported by stronger-than-expected macroeconomic statistics from the United Kingdom, which showed that the economy grew by 1.3 percent in the fourth quarter of 2021, rather than the 1 percent previously projected by analysts. In addition, the UK's current account deficit shrank dramatically in Q4 2021, from an upwardly revised figure of £28.9 billion in the previous quarter to £7.3 billion in the fourth quarter.

Having said that, a number of factors worked together to keep the USD from falling more and to keep the GBP/USD from rising further, at least for the time being. Expectations for a diplomatic settlement to the conflict in Ukraine were shattered by the incoming international news. This, together with the increased likelihood of fresh Western sanctions against Russia, helped to boost the value of the safe-haven dollar.

According to the most recent events in the Russia-Ukraine story, a Kremlin spokeswoman said on Wednesday that they have not seen anything that seems to be a breakthrough in discussions between the two countries. Another point of concern raised by a presidential advisor is that Russia is shifting forces from Kyiv in order to surround soldiers and launch strikes in the country's eastern region.

Another factor in favor of USD bulls is the assumption that the Federal Reserve would take a more aggressive policy stance in order to tackle excessive inflation. As a matter of fact, the markets have been pricing in a 50 basis point rate rise at the Fed's next two meetings. The Bank of England, on the other hand, has toned down its emphasis on the necessity for additional rate increases. This, in turn, should help to keep the GBP/USD pair under control.

Market investors are now looking forward to the economic calendar in the United States, which will include the publication of the Core PCE Price Index, which is the Federal Reserve's preferred inflation indicator. The emphasis, on the other hand, will continue to be on the latest developments in the Russia-Ukraine conflict. This, together with the rates on US Treasury bonds, will have an impact on the price dynamics of the USD and provide some traction to the GBP/USD pair.

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