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GBP/USD regains positive traction on Tuesday amid the emergence of fresh selling around the USD.

Bets for smaller Fed rate hikes, sliding US bond yields, a positive risk tone undermine the greenback.A bleak outlook for the UK economy could act as a headwind for the British Pound and cap the pair.

The GBP/USD pair attracts fresh buying in the vicinity of the 1.1800 round-figure mark on Tuesday and reverses a major part of the overnight losses. The pair maintains its bid tone through the early North American session and is currently placed around the 1.1870 region, just a few pips below the daily top.

The US Dollar comes under some renewed selling pressure and stalled its recent strong bounce from the lowest level since August 12, which, in turn, offers support to the GBP/USD pair. Rising bets for relatively smaller interest rate hikes by the Federal Reserve seem to weigh on the US Treasury bond yields and keep the USD bulls on the defensive. Apart from this, a modest recovery in the global risk sentiment is further seen undermining the safe-haven greenback.

The British Pound, on the other hand, draws support from expectations that the Bank of England will continue raising borrowing costs to combat stubbornly high inflation. Apart from this, reports that the UK government privately discussed the possibility of a Swiss-style relationship with the European Union further underpins the Sterling. This, in turn, provides an additional boost to the GBP/USD pair, though a bleak outlook for the UK economy could cap any further gains.

In fact, the UK Office for Budget Responsibility (OBR) last week projected the UK GDP to slump by 1.4% next year as compared to a growth of 1.8% forecast in March. Apart from this, worries about economic headwinds stemming from a new COVID-19 outbreak in China and the imposition of fresh lockdowns should keep a lid on any optimism in the markets. This, along with the recent hawkish signals from several Fed officials, could limit the USD losses and cap the GBP/USD pair.

Hence, the market focus will remain glued to the release of the November FOMC monetary policy meeting minutes, due on Thursday. Investors will look for clues about the Fed’s policy outlook and future rate hike path. This will influence the USD price dynamics and determine the near-term trajectory for the GBP/USD pair. In the meantime, traders on Tuesday will look to the release of the Richmond Manufacturing Index and Cleveland Fed President Loretta Mester’s speech for some impetus.

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