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  • Rallying US bond yields revived the USD demand, which exerted some pressure on GBP/USD.
  • Concerns about the economic impact of lockdowns in the UK further weighed on the sterling.
  • The upbeat market mood capped the upside for the USD and helped limit losses for the pair.

The GBP/USD pair had good two-way price moves through the early European session and was last seen trading with modest losses, around the 1.3600 mark.

The ongoing strong rally in the US Treasury bond yields provided a much-needed respite to the US dollar and prompted some selling around the GBP/USD pair. Democratic sweep in the crucial US Senate runoff elections in the state of Georgia raised expectations for a more expansive fiscal policy in the US. This, in turn, prompted investors to continue dumping Treasuries and pushed the yield on the benchmark 10-year US government bond further beyond the 1.0% mark, to the highest level since March 2020.

On the other hand, the British pound was weighed down by growing market worries about the potential economic fallout from the imposition a third national lockdown in the UK until mid-February. The move to curb an unprecedented level of COVID-19 infection is predicted to slow the economic recovery and might force the Bank of England to ease policy further. This turned out to be another factor that dragged the GBP/USD pair to an intraday low level of 1.3564, though the downside remained limited.

Apart from the likelihood of additional US financial aid, hopes for a strong global economic recovery in 2021 remained supportive of the prevalent risk-on environment. This was evident from a strong move up in the equity markets, which kept a lid on any runaway rally for the safe-haven USD and extended some support to the GBP/USD pair. On the economic data front, the UK Construction PMI edge lower to 54.6 in December, from 54.7 previous, albeit did little to provide any meaningful impetus to the pair.

Moving ahead, market participants now look forward to the US economic docket – highlighting the usual Initial Weekly Jobless Claims and ISM Services PMI. The data, along with the broader market risk sentiment, might influence the USD price dynamics and assist traders to grab some short-term opportunities.

Technical levels to watch