- GBP/USD gained strong positive traction for the second successive day on Wednesday.
- A positive risk tone, sliding US bond yields undermined the USD and extended support.
- The Fed’s hawkish outlook could act as a tailwind for the greenback and cap the upside.
- The worsening COVID-19 situation in the UK further warrants caution for bullish traders.
The emergence of some selling around the USD pushed the GBP/USD pair to a fresh weekly high, around the 1.3325 region during the mid-European session.
The pair added to the previous day's positive move and gained strong follow-through traction for the second successive day on Wednesday. The momentum allowed the GBP/USD pair to build on this week's bounce from the vicinity of the YTD low and was sponsored by a modest US dollar weakness.
Concerns that the fast-spreading Omicron variant could derail the global economic recovery eased amid reports that the current vaccines may be more effective than first thought in fighting the new strain. This, in turn, boosted investors' confidence and undermined the safe-haven greenback.
Apart from this, a softer tone around the US Treasury bond yields turned out to be another factor that weighed on the greenback. This, along with some technical buying on a sustained strength beyond the 1.3300 round figure, further contributed to the GBP/USD pair's strong intraday move up.
It, however, remains to be seen if bulls are able to capitalize on the move amid the worsening COVID-19 situation in the United Kingdom. In fact, UK Prime Minister Borish Johnson said that the Omicron-related data will be kept under review to see if stricter measures are needed next week.
This, along with the UK-EU impasse over the Northern Ireland Protocol could act as a headwind for the British pound. The UK Foreign Minister Liz Truss – now in charge of Brexit negotiations – reiterated that triggering Article 16 remains an option if the EU does not compromise further.
On the other hand, the Fed's hawkish outlook, indicating at least three rate hikes next year, should attract some USD buying at lower levels and keep a lid on any further gains for the GBP/USD pair. This, in turn, suggests that the intraday move up runs the risk of fizzling out rather quickly.
Market participants now look forward to the US economic docket, highlighting the release of the final Q3 GDP print and the Conference Board's Consumer Confidence Index. This, along with the US bond yields, might influence the USD price dynamics and provide some impetus to the GBP/USD pair.
