GBP/USD clings to gains near 1.3630 area, UK political turmoil caps the upside

• GBP/USD edged higher for the second successive day, though lacked bullish conviction.
• Rising bets for additional BoE rate hike extended support amid subdued USD demand.
• The UK political drama acted as a headwind for sterling and capped gains for the major.

The GBP/USD pair maintained its bid tone through the first half of the European session and was last seen trading just a few pips below the daily high, around the 1.3630 region.

The pair edged higher for the second successive day on Thursday and inched back closer to the previous day's swing high, around mid-1.3600s touched in reaction to stronger UK CPI print. In fact, the UK consumer inflation accelerated to 5.4% YoY in December or the highest level in nearly 30 years, lifting bets for additional rate hikes by the Bank of England.

Apart from this, the announcement to lift COVID-19 restrictions imposed to fight the surge in Omicron cases in the UK acted as a tailwind for the British pound. This, along with subdued US dollar demand, further extended some support to the GBP/USD pair, though a combination of factors held back traders from placing aggressive bullish bets and capped the upside.

Firming market expectations that the Fed would begin raising interest rates in March underpinned the buck amid a fresh leg up in the US Treasury bond yields. This, along with growing demands for UK Prime Minister Boris Johnson's resignation over a series of lockdown parties in Downing Street, kept a lid on any meaningful gains for the GBP/USD pair, at least for now.

The fundamental backdrop makes it prudent to wait for a strong follow-through buying before confirming that the recent rejection slide from the very important 200-day SMA has run its course. There isn't any major market-moving economic data due for release from the UK on Thursday, leaving the GBP/USD pair at the mercy of the USD price dynamics.

Meanwhile, the US economic docket features the releases of the Philly Fed Manufacturing Index, Weekly Initial Jobless Claims and Existing Home Sales data. Apart from this, traders will take cues from the US bond yields and the broader market risk sentiment, which will influence the greenback and produce some short-term opportunities around the GBP/USD pair.

Technical levels to watch