GBP/USD Outlook: Break below mid-1.3500s to pave the way for further weakness

• Sustained USD selling bias allowed GBP/USD to gain some intraday positive traction on Wednesday.
• Concerns about the economic impact of fresh lockdowns in the UK capped the upside for the major.
• Hopes for more US fiscal stimulus kept the USD bulls on the defensive and should help limit losses.

The GBP/USD pair had some good two-way price swings on Wednesday and was influenced by a combination of diverging forces. The emergence of some fresh selling around the US dollar assisted the pair to gain some positive traction and climb to an intraday high level of 1.3670 region. A Democratic victory in the crucial US Senate runoff elections in the state of Georgia boosted hopes for more US fiscal stimulus measures, which, in turn, dragged the USD to its lowest level in nearly three years.

However, investors remain worried about the imposition a third national lockdown in the UK until mid-February to curb an unprecedented level of COVID-19 infection. The move is predicted to slow the economic recovery and force the Bank of England to ease its monetary policy further. This, along with a downward revision of the UK Services PMI for December and a modest intraday USD rebound, kept a lid on any runaway rally for the major, rather prompted some fresh selling at higher levels.

Expectations of larger government borrowing pushed the benchmark 10-year US Treasury yield beyond 1.0% mark for the first time since March. Apart from this, concerns about the prospect for tighter regulations on technology mega-caps led to a selloff in Nasdaq futures and provided some respite to the safe-haven USD. Meanwhile, the attempted USD recovery quickly ran out of the steam after the ADP report showed that the US private sector unexpectedly decreased by 123K in December.

Separately, the minutes from the Fed's meeting last month revealed unanimous support to keep the bond-buying program unchanged and that some members are in favour of expanding stimulus. The minutes did little to impress the USD bulls and allowed the pair to rebound around 70 pips from weekly lows. The pair edged higher during the Asian session on Thursday but lacked any follow-through amid rallying US bond yields and was last seen trading with minor losses, just below the 1.3600 mark.

That said, increasing bets for additional US financial aid and a strong global economic recovery in 2021 should help limit any meaningful slide for the major. Market participants now look forward to the UK Construction PMI for some impetus. The US economic docket highlights the releases of the usual Initial Weekly Jobless Claims and ISM Services PMI. The data, along with the broader risk sentiment, might influence the USD price dynamics and produce some meaningful trading opportunities.

Short-term technical outlook

From a technical perspective, the overnight slide below a one-and-half-week-old ascending trend-line support might have shifted the bias in favour of bearish traders. However, resilience below the 200-hour SMA makes it prudent to wait for some follow-through selling below mid-1.3500s before positioning for any further depreciating move. A convincing breakthrough might turn the pair vulnerable to accelerate the slide to the key 1.3500 psychological mark. The mentioned level coincides with the 38.2% Fibonacci level of the 1.3188-1.3704 strong move up and should act as a key pivotal point for short-term traders.

On the flip side, the overnight swing highs, around the 1.3670 region, now becomes immediate strong resistance. A sustained move beyond will negate prospects for any further decline and assist bulls to make a fresh attempt to conquer the 1.3700 mark. The momentum could further get extended towards the 1.3780-85 intermediate resistance before the pair eventually aims to reclaim the 1.3800 mark.