GBP/USD rebounds swiftly after dropping to fresh YTD low, back above 1.3200 mark

• GBP/USD witnessed aggressive selling in reaction to reports of fresh COVID-19 restrictions in the UK.
• The latest development might have dashed hopes for a BoE rate hike and weighed heavily on the GBP.
• A turnaround in the risk sentiment benefitted the safe-haven USD and contributed to the selling bias.

The GBP/USD pair witnessed aggressive selling during the mid-European session and dived to a fresh one-year low, closer to mid-1.3100s in the last hour, albeit quickly recovered a few pips thereafter.

Following the previous day's modest rebound, the GBP/USD pair came under some renewed bearish pressure on Wednesday and prolonged its bearish trend witnessed since late October. The British pound weakened across the board in reaction to reports about the imposition of fresh COVID-19 restrictions in the UK, which could take effect as early as tomorrow.

This, along with the UK-EU impasse over the Northern Ireland Protocol, seem to have dashed hopes for an imminent interest rate hike by the Bank of England later this month. This, in turn, weighed heavily on the sterling. The sharp intraday fall could further be attributed to some technical selling on a sustained break below the 1.3200 round figure.

Meanwhile, the latest development took its toll on the global risk sentiment, which was evident from a turnaround in the equity markets. Adding to this, the prospects for a faster policy tightening by the Fed drove some flows towards the safe-haven greenback. This further contributed to the GBP/USD pair's fall of around 100 pips from the daily swing high.

The latest leg down validated the recent breakdown through a downward sloping channel and might have already set the stage for additional losses. That said, RSI on short-term charts are already flashing or are on the verge of breaking into the oversold territory. This, in turn, assisted the GBP/USD pair to quickly recover over 50 pips from the vicinity of mid-1.3100s.

In the absence of any major market-moving economic releases, either from the UK or the US, fresh developments surrounding the coronavirus saga will play a key role in influencing the GBP/USD pair. Traders will further take cues from the broader market risk sentiment, which will drive the USD demand and produce some short-term opportunities.

Technical levels to watch