GBP/USD Analysis: Upside remains capped amid Russia-Ukraine stand-off

• GBP/USD shot to a fresh weekly high on Wednesday, albeit lacked follow-through buying.
• Tension over the NI Protocol of the Brexit agreement acted as a headwind for sterling.
• Russia-Ukraine tensions boosted the safe-haven USD and capped the upside for the major.

The GBP/USD pair built on the previous day's late rebound from the 1.3485 region, or a two-week low and gained some follow-through traction on Wednesday. The momentum pushed the pair to a fresh weekly high and was sponsored by a combination of factors. Russia announced that it is moving troops away from the Ukrainian border after the completion of military exercises. This helped ease fears about a full-blown conflict between Russia and the West and continued undermining the safe-haven US dollar. On the other hand, the British pound drew support from hotter-than-expected UK consumer inflation figures, which boosted bets for additional interest rate hikes by the Bank of England.

The UK Office for National Statistics reported that the annual inflation rate, as measured by CPI, climbed for the 13th month to its highest level in almost 30 years and came in at 5.5% in January. This was slightly above consensus estimates pointing to a steady reading of 5.4%. Against the backdrop of Tuesday's stronger UK wage growth figures, the data lifted expectations for a 50 bps rate hike at the March MPC meeting. This was reinforced by the fact that the yield on the 2-year UK government bond, which is more sensitive to rate hike expectations, shot to the highest level since 2011. This, in turn, acted as a tailwind for sterling and remained supportive of the pair's uptick.

From the US, the Census Bureau reported that monthly Retail Sales recorded strong-than-anticipated growth of 3.8% in January. Excluding autos, core retail sales also surpassed estimates and rose 3.3% during the reported month. The data reinforced market expectations for a faster policy tightening by the Fed and provided a modest lift to the buck, though the uptick lacked bullish conviction. The USD remained on the defensive following the release of a much less hawkish FOMC meeting minutes, which suggested that policymakers are not set on a particular pace of interest rate hikes. This was seen as another factor that pushed the pair back towards the 1.3600 round-figure mark.

That said, doubt on Russian claims that its troops are withdrawing from the Ukraine border kept a lid on the recent optimistic move in the markets. The United States and NATO said on Wednesday that there were no signs of de-escalation on the ground from the Russian side. Adding to this, reports that Ukrainian forces have fired mortars and grenades on the LPR region triggered a fresh leg down in the equity markets during the Asian session on Thursday. LPR is Luhansk People's Republic located in Luhansk Oblast in the Donbas region, a territory internationally recognized to be a part of Ukraine but run by Russian-backed separatists. This helped revive demand for the safe-haven USD.

This, along with tensions over the Northern Ireland Protocol, attracted fresh selling around the pair. In the absence of any major market-moving economic releases from the UK, the pair remains at the mercy of the USD price dynamics. Hence, the market focus will remain on geopolitical developments, which will influence the broader market risk sentiment and drive the USD demand. Later during the early North American session, traders will take cues from the US economic docket - featuring the releases of the Philly Fed Manufacturing Index, Weekly Initial Jobless Claims and housing market data.

Technical outlook

From a technical perspective, the pair continued with its struggle to make it through a resistance marked by the 61.8% Fibonacci retracement level of the 1.3749-1.3358 downfall. Moreover, the recent two-way price action witnessed over the past two weeks or so points to indecision among traders. This, in turn, warrants some caution before placing aggressive bullish bets. That said, sustained strength beyond the 1.3600 mark has the potential to lift the pair back towards last week's swing high, around the 1.3640-1.3645 region.

The latter coincides with a downward sloping trend-line extending from July 2021, which is followed by the very important 200-day SMA, just ahead of the 1.3700 mark. Some follow-through buying will be seen as a fresh trigger for bullish traders and pave the way for a further near-term appreciating move.

On the flip side, any meaningful slide might continue to find decent support near the key 1.3500 psychological mark, representing the 38.2% Fibo. level. Sustained weakness below the 1.3490-1.3485 region could drag the pair towards the 23.6% Fibo. level, around mid-1.3400s. The downward trajectory could further get extended towards the 1.3400 mark and the next relevant support near the 1.3355 area.