GBP/USD downside is likely to be limited after bears failed to hold a break below 1.29 on Tuesday. However, advancing back toward the 2024 highs hit earlier this month will be challenging as traders await guidance from both the Bank of England (BoE) and the Federal Reserve (Fed). Additionally, yen dynamics could impact the pair. Tuesday's sterling weakness was partly due to GBP/JPY selling after Japan's ruling Liberal Democratic Party secretary-general Toshimitsu Motegi said the Bank of Japan (BoJ) should more clearly indicate its resolve to normalize monetary policy, including steady interest rate hikes. This followed comments from Prime Minister Fumio Kishida, who stated that BoJ policy normalization would support Japan's transition to a growth-driven economy, fueling hawkish rate expectations ahead of the upcoming BoJ meeting. As a result, GBP/JPY was down 0.71%.

Sterling bulls are facing challenges after recent success, which saw GBP net speculative long positioning rise to all-time highs. Year-to-date, GBP/USD has risen 1.47%, and GBP/JPY has rallied 12.3%. However, should the BoJ surprise markets with a rate hike or more austere rate guidance, yen buying could increase against major currencies. This could result in significant sterling selling versus the yen, potentially capping GBP/USD below the recent high of 1.3044.

In late New York trade, GBP/USD was soft, down 0.15% at 1.2910, with a North American range of 1.2920-1.2900. The pair hit a one-week low of 1.2889 overnight due to cross sales and a hawkish BoJ outlook. Traders are now focusing on UK flash PMI data due Wednesday for clues on UK growth and inflation, which will influence the BoE's stance. Additionally, Friday's PCE index data will be crucial for the Fed's policy path.

Support levels are at Tuesday's low of 1.2889, the daily low of 1.2848 from July 11, and the 50% retracement of the 1.2613-1.3044 move at 1.2829. Resistance levels include Tuesday's North American pullback high of 1.2920, the 10-day moving average at 1.2940, and the 200-hour moving average at 1.2954.

The key question remains: Will the BoJ cast a shadow over sterling? With significant data releases and central bank guidance pending, the market is poised for potential volatility.

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