GBP/USD refreshes daily high near mid-1.3500s, stronger USD warrants caution for bulls

• GBP/USD attracted some dip-buying on Tuesday, though lacked strong follow-through.
• Rising US bond yields provided a strong lift to the USD and capped any further upside.
• Fresh tensions over the NI protocol also acted as a headwind for sterling and the major.

The GBP/USD pair rallied nearly 50 pips from the early European session low and shot to a fresh daily high, around mid-1.3500s in the last hour.

The pair attracted some dip-buying in the vicinity of the key 1.3500 psychological mark on Tuesday and is now looking to build on the overnight bounce from a four-day low. The uptick lacked any obvious fundamental catalyst and runs the risk of fizzling out rather quickly amid a goodish pickup in the US dollar demand.

Expectations that the Fed would tighten its policy at a faster pace triggered a fresh leg up in the US Treasury bond yields and underpinned the greenback. In fact, the markets are pricing in a 50 bps rate hike in March, which, in turn, pushed the yield on the benchmark 10-year US government bond closer to the 2.0% threshold.

Moreover, the yield on the 2-year and 5-year notes – which are sensitive to rate hike expectations – jumped to the highest level since February 2020 and July 2019, respectively. That said, a recovery in the risk sentiment – as depicted by a positive tone around the equity markets – capped gains for the safe-haven USD.

On the other hand, tensions over the Northern Ireland protocol of the Brexit agreement could undermine sterling and keep a lid on any further upside for the GBP/USD pair. In the recent development, a German official said on Thursday that Britain should respect post-Brexit trade rules or else face consequences.

Hence, it will be prudent to wait for a strong follow-through buying before positioning for any meaningful gains amid absent relevant market-moving economic releases, either from the UK or the US. Investors might also refrain from placing aggressive bets ahead of Thursday's US CPI report and key UK macro data on Friday.

Technical levels to watch