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  • GBP/USD edged lower on Friday and eroded a part of the overnight gains to near three-year tops.
  • Indications that UK lockdowns could be extended, downbeat UK macro data weighed on the GBP.
  • A modest pullback in the equity markets benefitted the safe-haven USD and added to the selling.

The GBP/USD pair lost some additional ground in reaction to downbeat UK macro data and dropped to fresh session lows, around the 1.3675-70 region in the last hour.

The pair witnessed some selling on the last trading day of the week and eroded a part of the previous session’s strong positive move to the highest level since May 2018. The British pound was weighed down by indications that lockdown restrictions will be extended in the UK and weakened further following the release of UK Retail Sales data.

In fact, the headline figures recorded a modest growth of 0.3% MoM in December, while core sales (stripping the auto motor fuel sales) stood at 0.4% MoM. This marked a notable rebound from sharp contraction recorded in November but the readings were well short of market expectations and exerted some additional pressure on the sterling.

Apart from this, the GBP/USD pair was further pressured by a modest pickup in the US dollar demand amid a modest pullback in the equity markets. The imposition of fresh lockdowns in China prompted investors to take some profits off the table following the recent strong rally, led by hopes for additional US fiscal stimulus measures.

Investors have been pricing in the prospects for a massive US fiscal spending in 2021 under Joe Biden’s presidency. This, along with the optimism over the rollout of vaccines for the highly contagious coronavirus disease, has been fueling expectations for a strong economic recovery and boosting investors confidence.

The underlying bullish sentiment, in turn, might keep a lid on any meaningful recovery for the greenback and help limit the downside for the GBP/USD pair. This makes it prudent to wait for some strong follow-through selling before confirming that the pair has topped out in the near-term and positioning for any further corrective slide.

Market participants now look forward to the release of the flash version of the UK PMI prints for January. A weaker than expected reading will add to the market worries about the UK economic growth at the start of 2021 and prompt some fresh selling around the GBP/USD pair, paving the way for an extension of the intraday corrective slide.

Technical levels to watch