- GBP/USD witnessed some selling on Wednesday and retreated further from 34-month tops.
- Strong follow-through USD buying was seen as a key factor exerting pressure on the major.
- The downside seems limited, warranting caution before placing aggressive bearish bets.
The GBP/USD pair continued losing ground through the mid-European session and dropped to two-day lows, around mid-1.3800s in the last hour.
The pair struggled to capitalize on the UK CPI-led uptick, instead met with some fresh supply near the 1.3900 mark and retreated further from 34-month tops, around the 1.3950 region touched on Tuesday. The corrective slide was exclusively sponsored by some strong follow-through US dollar buying interest, which seemed rather unaffected by a modest pullback in the US Treasury bond yields.
The US bond market has been reacting to the likelihood of the passage of President Joe Biden’s proposed $1.9 trillion stimulus package. Expectations for a larger government borrowing to fund the stimulus, the prospects of a prompt US economic recovery and a possible acceleration in inflation pushed the yield on the benchmark 10-year bond to the highest level since February 2020.
Meanwhile, the prospect of better risk-free returns might continue to underpin the USD demand and sets the stage for a further near-term depreciating move for the GBP/USD pair. That said, the downside remains limited amid optimism that the impressive pace of vaccinations in the UK would allow the UK Prime Minister Boris Johnson to lift COVID-19 restrictions and get the economy moving.
Hence, it will be prudent to wait for some strong follow-through selling before confirming that the GBP/USD pair has topped out in the near-term and positioning for an extension of the corrective slide. Market participants now look forward to the release of monthly Retail Sales data. This, along with the US bond yields, might influence the USD and produce some trading opportunities.
Technical levels to watch
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