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27 Dec 2021

GBP/USD surrenders modest intraday gains, holds steady below 1.3400 mark

  • Receding Omicron fears assisted GBP/USD to gain some positive traction on Monday.
  • A goodish pickup in the USD demand kept a lid on any meaningful gains for the major.
  • The year-end thin liquidity conditions warrant caution before placing directional bets.

The GBP/USD pair quickly reversed an early European session uptick and was last seen hovering near the lower end of its daily trading range, just below the 1.3400 mark.

The British pound has been one of the top performers over the past one week or so amid more positive news concerning the Omicron variant of the coronavirus. In fact, reports suggested the new strain may be less severe than the previous Delta variant. Adding to this, a UK study indicated that Omicron infections are less likely to lead to hospitalization. This comes on the back of a surprise rate hike by the Bank of England, which, in turn, was seen as a key factor that continued lending some support to the GBP/USD pair.

That said, expectations that the UK government may opt to impose new restrictions – amid the fast spread of the Omicron variant in Britain – acted as a headwind for the sterling. This, along with a goodish pickup in the US dollar demand capped any meaningful upside for the GBP/USD pair. Uncertainty over the economic impact of the continuous rise in new COVID-19 cases tempered investors' appetite for riskier assets. This was evident from a softer tone around the equity markets, which benefitted the safe-haven greenback.

Apart from this, the Fed's hawkish outlook, indicating at least three rate hikes in 2022, underpinned the greenback and kept a lid on any further gains for the GBP/USD pair. Traders also seemed reluctant to place aggressive bets amid the year-end thin liquidity conditions and absent relevant market-moving economic releases, either from the UK or the US. This makes it prudent to wait for some follow-through buying before positioning for an extension of the recent bounce from the vicinity of mid-1.3100s, or the YTD low touched earlier this month.

Technical levels to watch

 

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