GBP/USD sticks to modest intraday gains near mid-1.3500s, lacks follow-through

• GBP/USD gained some positive traction on Wednesday amid modest USD weakness.
• A softer tone surrounding the US bond yields acted as a headwind for the greenback.
• Fresh Brexit-related tensions should keep a lid on any meaningful gains for the major.

The GBP/USD pair held on to its modest intraday gains through the early European session and was last seen trading just a few pips below the weekly high, around mid-1.3500s.

The pair gained some positive traction on Thursday and might now be looking to build on this week's bounce from sub-1.3500 levels amid modest US dollar weakness. A softer tone surrounding the US Treasury bond yields kept the USD bulls on the defensive, though rising bets for a 50 bps Fed rate hike in March should limit losses.

Investors seem convinced that the Fed would adopt an aggressive policy response to combat persistent high inflation, which was evident from the recent run-up in the US bond yields. In fact, the yield on the benchmark 10-year US government bond shot back closer to the 2.0% threshold, or its highest level since August 2019 on Tuesday.

Moreover, the 2-year and 5-year notes – which are highly sensitive to rate hike expectations – rose to the highest level since February 2020 and July 2019, respectively. This, in turn, supports prospects for the emergence of some USD dip-buying and keep a lid on any meaningful upside for the GBP/USD pair, at least for the time being.

Investors might also be reluctant to place aggressive bets and prefer to wait on the sidelines ahead of Thursday's release of the latest US consumer inflation figures. Apart from this, tensions over the Northern Ireland Protocol of the Brexit agreement should further undermine the British pound and cap gains for the GBP/USD pair.

Hence, it will be prudent to wait for a strong follow-through buying before positioning for any further gains. In the absence of any relevant market-moving economic releases, the US bond yields will play a key role in influencing the USD demand. This, in turn, should produce some short-term trading opportunities around the GBP/USD pair.

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