GBP/USD clings to gains above 1.2350, lacks follow-through ahead of US PCE Price Index

• GBP/USD stages a goodish recovery from its lowest level since April amid modest USD weakness.
• The British Pound draws additional support from the better-then-expected UK Retail Sales figures.
• The divergent BoE-Fed expectations could cap the upside ahead of the key US Core PCE Price Index.

The GBP/USD pair gains some positive traction on Friday and snaps a three-day losing streak to the 1.2300 neighbourhood, or its lowest level since early April touched the previous day. Spot prices stick to intraday gains through the first half of the European session and currently trade around the 1.2360 region, up over 0.30% for the day.

A modest pullback in the US Treasury bond yields prompts traders to lighten their US Dollar (USD) bullish bets, especially after the recent move up to over a two-month high, which, in turn, lends support to the GBP/USD pair. The British Pound (GBP), meanwhile, gets an additional lift following the better-than-expected release of the UK Retail Sales figures, which rose 0.5% in April as compared to the 0.3% expected and the 1.2% decline registered in the previous month.

The upside for the GBP/USD pair, however, seems limited amid expectations that fewer rate increases by the Bank of England (BoE) will be needed in the coming months to bring down inflation. The bets were reaffirmed by the fact that the UK CPI decelerated sharply from the 10.1% YoY rate in March to 8.7% in April. Furthermore, speculations that the Federal Reserve (Fed) will keep interest rates higher for longer favour the USD bulls and might cap the major.

In fact, the markets started pricing in the possibility of another 25 bps lift-off at the June FOMC policy meeting in the wake of the recent hawkish comments by several Fed officials. Adding to this, the upbeat US macro data released on Thursday could allow the Fed to stick to its hawkish stance. This should act as a tailwind for the US bond yields, which supports prospects for the emergence of some USD dip-buying and contribute to keeping a lid on the GBP/USD pair.

Traders might also refrain from placing aggressive bets and prefer to wait on the sidelines ahead of the release of the US Core PCE Price Index - the Fed's preferred inflation gauge - later during the early North American session. Friday's US economic docket also features the release of Durable Goods Orders, which, along with the US bond yields and the US debt ceiling talks, will influence the USD and provide some meaningful impetus to the GBP/USD pair.

Technical levels to watch