GBP/USD eases from three-day highs, remains below mid-1.3400s amid Brexit woes

• GBP/USD gained positive traction for the second successive day amid weaker USD.
• Brexit woes might hold back bulls from placing aggressive bets around the sterling.
• Hawkish Fed expectations should limit the USD losses and collaborate to cap gains.

The GBP/USD pair shot to fresh three-day highs, closer to mid-1.3400s during the mid-European session, albeit lacked follow-through buying.

The pair attracted some dip-buying near the 1.3400 mark on Monday and turned positive for the second successive day, allowing bulls to build on Friday's recovery move from YTD lows. The uptick was exclusively sponsored by some follow-through US dollar selling, though a combination of factors should hold back bulls from placing aggressive bets.

The University of Michigan survey released on Friday showed that the US consumer sentiment plunged to a 10-year low in November. This, along with sliding US Treasury bond yields and the underlying bullish sentiment in the financial markets, undermined the safe-haven greenback. However, hawkish Fed expectations should help limit the USD losses.

Investors seem convinced that the fed would be forced to adopt a more aggressive policy response to contain stubbornly high inflation, which surged to the highest level since 1990 in October. In fact, the Fed funds futures indicate a 50% probability that the Fed will hike interest rates in July 2022 and a high likelihood of another raise by November.

Apart from this, the risk that Britain will trigger Article 16 and suspend parts of the Northern Ireland Protocol should act as a headwind for the British pound. This, in turn, suggests that any subsequent positive move is more likely to get sold into and runs the risk of fizzling out rather quickly, further warranting caution for bullish traders.

Market participants now look forward to the US economic docket, highlighting the only release of the Empire State Manufacturing Index for some impetus during the early North American session. This, along with the US bond yields and the broader market risk sentiment, could influence the USD price dynamics and produce some trading opportunities around the GBP/USD pair.

Technical levels to watch