GBP/USD jumps back above 1.3500 mark, fresh daily high amid subdued USD demand

• GBP/USD regained positive traction on Tuesday and shot back above the 1.3500 mark.
• The risk-on mood, softer US bond yields undermined the USD and extended support.
• The worsening COVID-19 situation in the UK might keep a lid on the intraday move up.

The GBP/USD pair rallied nearly 50 pips from the daily swing low and shot back above the key 1.3500 psychological mark during the first half of the European session.

The pair attracted some buying near the 1.3460-55 area on Tuesday and reversed a part of the overnight slide to a three-day low, around the 1.3430 region. The prevalent risk-on mood, along with a softer tone around the US Treasury bond yields acted as a headwind for the safe-haven US dollar. This, in turn, was seen as a key factor that assisted the GBP/USD pair to regain positive traction.

The British pound further benefitted from the fact that the UK Prime Minister Boris Johnson suggested that there would be no further tightening of measures soon. Johnson, however, warned that the country's health system will remain under strain amid the current Omicron-driven surge in COVID-19 infections. This might hold back traders from placing bullish bets around the GBP/USD pair.

On the other hand, expectations for a faster policy tightening by the Fed should act as a tailwind for the US bond yields. In fact, the money markets have fully priced in the first-rate hike by May and two more by the end of 2022. This, in turn, supports prospects for a further near-term appreciating move for the greenback, which should further contribute to capping the upside for the GBP/USD pair.

On the economic data front, the UK Manufacturing PMI was finalized at 57.9 for December as against the flash estimate of 57.6. The data did little to impress traders or provide any meaningful impetus to the GBP/USD pair. Market participants now look forward to the US economic docket, featuring the release of ISM Manufacturing PMI and JOLTS Job Openings data for some short-term opportunities.

Technical levels to watch