GBP/USD trades with modest losses below 1.3600 mark, downside remains limited

• GBP/USD witnessed some fresh selling on Thursday amid a strong pickup in the USD demand.
• Concerns about the economic impact of lockdowns in the UK further weighed on the sterling.
• The risk-on mood might cap gains for the safe-haven USD and help limit losses for the major.

The GBP/USD pair remained depressed through the mid-European session and dropped to fresh daily lows, around the 1.3555 region in the last hour, albeit quickly recovered few pips thereafter.

Following the previous day’s good two-way price swings and an early uptick to the 1.3630-35 region, the pair met with some fresh supply on Thursday and was pressured by a solid US dollar rebound. The recent strong rally in the US Treasury bond yields – supported by prospects for more US fiscal stimulus – forced investors to unwind their bearish USD bets.

Investors started pricing in the likelihood of a more aggressive spending package in 2021 following the Democratic sweep in the US Senate runoff in the state of Georgia. This, in turn, means a larger government borrowing, which prompted investors to dump Treasuries and pushed the benchmark 10-year bond yield to the highest level since March, further beyond 1.0%.

On the other hand, the British pound was pressured by growing market worries about the potential economic fallout from the imposition a third national lockdown in the UK until mid-February. The move is predicted to slow the economic recovery and might force the Bank of England to ease policy further, which was seen as another factor weighing on the GBP/USD pair.

That said, the prevalent risk-on environment kept a lid on any runaway rally for the safe-haven greenback and helped limit the downside for the GBP/USD pair. The global risk sentiment remained well supported by hopes for a strong global economic recovery in 2021 and seemed rather unaffected by the unprecedented chaos in the US capital city on Wednesday.

In fact, supporters of the outgoing President Donald Trump stormed the Capitol Hill in an attempt to overturn his election defeat. Nevertheless, the US Congress approved Electoral College result earlier this Thursday and cleared the way for President-elect Joe Biden to take over as the 46th President of the United States on January 20.

Market participants now look forward to the US economic docket – highlighting the releases of the usual Initial Weekly Jobless Claims and ISM Services PMI for a fresh impetus. Apart from this, the broader market risk sentiment and the US bond yields will influence the USD price dynamics and produce some short-term trading opportunities around the GBP/USD pair.

Technical levels to watch