GBP/USD retreats further from multi-week high, slides back closer to 1.3500 mark

The GBP/USD pair extended the previous day's retracement slide from the vicinity of the 1.3600 mark, or a near two-month high and edged lower through the first half of the trading on Thursday. The pair maintained its offered tone heading into the European session and was last seen flirting with the daily low, around the 1.3520-15 region.

The December 14-15 FOMC policy meeting minutes pointed to a faster-than-expected rise in interest rates. Moreover, almost all participants agreed that it would likely be appropriate to initiate balance sheet runoff at some point after the first increase. A big shift in policymakers' tone continued underpinning the US dollar, which, in turn, was seen as a key factor that prompted some follow-through selling around the GBP/USD pair.

Meanwhile, the market was quick to price in a roughly 80% chance of a 25 bps Fed hike by March 2022. This acted as a fresh catalyst for an extended selloff in the US bond markets, which along with worries about the rapid spread of the Omicron variant triggered a steep fall in the equity markets. The risk-off impulse further benefitted the greenback's relative safe-haven status and exerted additional pressure on the GBP/USD pair.

That said, hopes that the Omicron outbreak won't derail the UK economy and rising bets for a further policy tightening by the Bank of England could lend some support to the British pound. That said, the worsening COVID-19 situation in Britain could act as a headwind for the sterling. The mixed fundamental backdrop warrants some caution for aggressive traders and before positioning for any firm near-term direction for the GBP/USD pair.

Market participants now look forward to the release of the final UK Services PMI for some impetus. Later during the early North American session, traders will take cues from the US economic docket – highlighting the releases of the usual Weekly Initial Jobless Claims and ISM Services PMI. Apart from this, the US bond yields and the broader market risk sentiment, might influence the USD price dynamics and produce some trading opportunities around the GBP/USD pair.

Technical levels to watch