GBP/USD drops to two-month lows and rebounds, finds some support ahead 1.2700 mark

The GBP/USD pair dropped to near two-month lows, around the 1.2725 region during the early European session, albeit managed to defend the very important 200-day SMA and quickly retreated few pips thereafter. 

The pair extended its recent rejection slide from the key 1.3000 psychological mark and remained under some selling pressure for the third consecutive session on Tuesday. The British Pound retained its softer bias across the board amid fears a new nationwide lockdown aimed at stemming the second wave of coronavirus infections.

In fact, British Cabinet Minister Michael Gove said that new restrictions will be imposed in the UK and Prime Minister Boris Johnson will spell out further details later today. Gove further urged people to work from home if possible. This comes amid persistent Brexit anxieties, which further contributed to the weakness surrounding the sterling.

The GBP/USD pair had a rather muted reaction the BoE Governor Andrew Bailey's comments that the UK economic recovery has been quite rapid and substantial, though is very uneven. Bailey acknowledged that labour demand is weak and unemployment is higher than the reported number. Investment is also very weak, but the housing market is strong Bailey added further.

On the other hand, the US dollar added to the previous day's strong gains and remained well supported by the prevalent risk-off environment. Meanwhile, the latest leg of a fall over the past hour or so could further be attributed to some technical selling below the previous swing lows support near the 1.2765-60 region.

In the absence of any major market-moving economic releases, the latest developments surrounding the virus situation will play a key role in driving the broader market risk sentiment. This, in turn, might influence the USD price dynamics and produce some trading opportunities ahead of the Fed Chair Jerome Powell's congressional testimony.

Technical levels to watch