GBP/USD retreats further from monthly top, slides closer to mid-1.3400s

The GBP/USD pair maintained its bid tone through the early European session and was last seen trading near the daily low, around the 1.3465-60 region.

The pair struggled to find acceptance above the key 1.3500 psychological mark and witnessed a modest pullback from the highest level since November 19 touched earlier this Thursday. The US dollar made a solid comeback and reversed a major part of the overnight losses back closer to the monthly low. This, along with the worsening COVID-19 situation in the United Kingdom, attracted some selling around the GBP/USD pair.

The greenback drew some support from the overnight spike in the US Treasury bond yields that followed soft demand for a $56 billion auction of seven-year notes. In fact, the yield on the benchmark 10-year US government bond shot to 1.56% for the first time since November 29. Adding to this, the Fed's hawkish outlook pushed the two-year yield to the highest since March 2020 and provided a goodish lift to the greenback.

Meanwhile, Britain reported a record 183,037 new COVID-19 cases on Wednesday, which could force the government to impose more restrictions. It is worth recalling that the UK Prime Minister Boris Johnson had said last week that ministers would keep the latest data under constant review to see if additional stricter measures are needed. This was seen as another factor that acted as a headwind for the British pound.

It, however, remains to be seen if the GBP/USD pair is able to attract some buying at lower levels or the downtick marks the end of the recent strong recovery from the YTD low touched earlier this month. There isn't any major market-moving economic data due for release from the UK. This warrants some caution for bearish traders makes it prudent to wait for some follow-through selling before confirming that the pair has topped out.

Market participants now look forward to the US economic docket – featuring the usual Weekly Initial Jobless Claims and Chicago PMI – for a fresh impetus. This, along with the US bond yields, will influence the USD price dynamics. Traders might also take cues from developments surrounding the coronavirus saga to grab some short-term opportunities around the GBP/USD pair amid thin end-of-year trading conditions.

Technical levels to watch