GBP/USD bounces off daily low, lacks follow-through; remains below 50-day SMA

• GBP/USD reverses an intraday dip amid a modest USD pullback from over a two-month high.
• The disappointing release of the Chicago PMI prompts some profit-taking around the USD.
• Bets for more Fed rate hikes and the risk-off impulse should act as a tailwind for the buck.

The GBP/USD pair attracts some dip-buying near the 1.2350-1.2345 area on Wednesday and climbs to the top end of its daily trading range during the early North American session. The pair is currently placed around the 1.2400 mark, below the 50-day Simple Moving Average (SMA) hurdle tested the previous day.

The US Dollar (USD) trims a part of its intraday gains to the highest level since mid-March in reaction to the disappointing release of the Chicago PMI, which fell to 40.4 in May from the 48.6 previous. The British Pound, on the other hand, continues to draw some support from the possibility of additional interest rate hikes by the Bank of England (BoE), bolstered by stronger-than-expected consumer inflation figures released last week. This, in turn, lends some support to the GBP/USD pair, though the lack of follow-through buying warrants caution before positioning for an extension of the recent bounce from the 1.2300 neighbourhood, or a nearly two-month low set last Thursday.

Investors now seem convinced that the Federal Reserve (Fed) will keep interest rates higher for longer and have been pricing in another 25 bps lift-off at the next FOMC policy meeting in June. The bets were reaffirmed by the US Core PCE Price Index released on Friday, which indicated that inflation remains sticky. Apart from this, the risk-off impulse supports prospects for a further near-term appreciating move for the safe-haven buck and might contribute to capping any meaningful upside for the GBP/USD pair. The global risk sentiment takes a hit in the wake of weaker Chinese PMI prints, which adds to worries about a global economic downturn and benefits safe-haven assets. 

The aforementioned fundamental backdrop warrants some caution for aggressive bullish traders ahead of important US macro releases scheduled at the beginning of a new month, including the closely-watched Nonfarm-Payrolls (NFP) on Friday. In the meantime, a generally weaker tone around the equity markets might continue to act as a tailwind for the Greenback and keep a lid on any meaningful upside for the GBP/USD pair, at least for the time being.

Technical levels to watch