GBP/USD trades with modest losses below mid-1.3900s

The GBP/USD pair quickly retreated around 35-40 pips from the early European session highs and dropped to fresh daily lows, around 1.3930-25 region in the last hour.

The pair struggled to capitalize on its intraday uptick, rather met with some fresh supply near the 1.3965-70 region and was pressured by sustained US dollar buying interest. Investors remained optimistic about the prospects for a relatively stronger US economic recovery amid the progress on COVID-19 vaccinations and a massive US fiscal spending plan. The upbeat US economic outlook continued underpinning the USD, which, in turn, was seen as a key factor that exerted some pressure on the GBP/USD pair.

Meanwhile, the reflation trade has been fueling expectations for a possible uptick in the US inflation and raised doubts that the Fed would retain ultra-low interest rate for a longer period. This, along with a cautious mood around the equity markets, further benefitted the greenback's relative safe-haven status against its British pound. That said, a modest pullback in the US Treasury bond yields held the USD bulls from placing aggressive bets and helped limit any further losses for the GBP/USD pair, at least for now.

The sterling was further supported by expectations that the UK government's plan to end lockdown restrictions by 21 June would lead to a swift economic recovery. That said, the lack of any meaningful buying interest and repeated failed attempts to move back above the key 1.4000 psychological mark suggests that the positive news is fully priced in. Hence, any attempted move up runs the risk of fizzling out rather quickly.

That said, investors might refrain from placing aggressive bets, rather prefer to wait on the sidelines ahead of the Fed Chair Jerome Powell's scheduled speech later during the North American session. Powell's comments on the risk of a rapid rise in long-term borrowing costs will drive the US bond yields and influence the USD price dynamics. This would eventually allow traders to grab some short-term opportunities.

Technical levels to watch