• GBP/USD rallied for the third successive day and shot to over a one-month high on Thursday.
  • Receding Omicron fears provided a strong boost to the sterling amid subdued USD demand.
  • The set-up favours bullish traders and supports prospects for a move to the key 1.3500 mark.

The GBP/USD pair prolonged this week's solid bounce from the vicinity of the YTD low and gained strong follow-through traction for the third successive day on Thursday. Investors turned optimistic amid reports that the current vaccines may be more effective in fighting the new variant than first thought. Adding to this, a UK study suggested that Omicron infections are less likely to lead to hospitalization and helped offset worries about surging COVID-19 cases in Britain. This, in turn, was seen as a key factor that acted as a tailwind for the British pound and provided a strong lift to the major amid subdued US dollar demand.

The prevalent risk-on environment – as depicted by a generally positive tone around the equity markets – continued undermining the greenback's relative safe-haven status. The buck did get a minor lift following the release of mostly upbeat US macro data. The Fed's preferred inflation gauge — the Personal Consumption Expenditures Price Index — accelerated to 5.7% YoY in November, marking the largest annual growth since 1982. Separately, the US Durable Goods Orders surpassed expectations and rose by 2.5% MoM in November. The data might have boosted bets for an eventual Fed liftoff in March, though failed to impress the USD bulls.

That said, the UK-EU impasse over the Northern Ireland Protocol (NIP) acted as a headwind for the sterling and capped any further gains for the major. In the latest Brexit-related news, the UK Foreign Minister Liz Truss – now in charge of Brexit negotiations – reiterated that their position on the NIP remains unchanged. Truss said that the UK remains prepared to trigger Article 16 if the role of the European Court of Justice as a final arbiter in the arrangement is not ended. Nevertheless, the pair finally settled around the 1.3400 mark, just a few pips below the one-month high and recorded its highest daily close since November 22.

As investors looked past the recent developments, the pair edged lower during the Asian session on Friday. The downside, however, is likely to remain cushioned as investors might refrain from placing aggressive bets amid absent relevant economic releases and the year-end thin liquidity conditions.

Technical outlook

From a technical perspective, the overnight strong move beyond the post-BoE swing high and the 1.3400 mark was seen as a fresh trigger for bullish traders. This might have already set the stage for a further near-term appreciating move. Given that oscillators on the daily chart have just started gaining positive traction, a move beyond an intermediate resistance near mid-1.3400s, en-route the key 1.3500 psychological mark, remains a distinct possibility.

On the flip side, any meaningful slide below the 1.3375-70 resistance breakpoint could now be seen as a buying opportunity and remain limited near the 1.3335 horizontal support. Some follow-through selling, leading to a subsequent break below the 1.3300 mark might negate the positive bias and prompt some technical selling. The pair might then turn vulnerable to accelerate the fall towards the 1.3200 mark with some intermediate support near the 1.3265-60 region.

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