GBP/USD retakes 1.3400 mark, fills the bearish gap amid modest USD pullback

• GBP/USD recovered around 100 pips from the daily low and has now filled the weekly bearish gap.
• Signs of stability in the equity markets undermined the safe-haven USD and extended some support.
• The upside remains capped amid fears about an escalation in tensions between Russia and the West.

The GBP/USD pair climbed to a fresh daily high during the mid-European session and is now looking to build on the momentum beyond the 1.3400 round-figure mark.

The pair rallied around 100 pips from the vicinity of the 1.3300 mark on Monday and has now filled the weekly bearish gap amid the emergence of some intraday US dollar selling. The nervousness over the worsening situation in Ukraine eased after the Russian negotiator said that they are interested to reach an agreement with Ukraine as soon as possible. This, in turn, led to a goodish recovery in the equity markets, which dented demand for the safe-haven greenback and was seen as a key factor behind the GBP/USD pair's strong intraday bounce.

According to the latest reports, the Ukraine-Russia dialogue has already started in Belarus and Russian media is coining this as 'peace talks', raising expectations for some de-escalation of tensions. Apart from this, a steep decline in the US Treasury bond yields, along with diminishing odds for a 50 bps Fed rate hike move in March, further undermined the greenback. The recent geopolitical developments now seem to have convinced investors that the Fed would not adopt a more aggressive policy stance to combat stubbornly high inflation.

It, however, remains to be seen if the GBP/USD pair is able to build on the move or meets with a fresh supply at higher levels amid the risk of a further escalation in tensions between Russia and the West.  It is worth recalling that Western nations ramped up efforts to punish Russia for its invasion of Ukraine and imposed tough new sanctions, including cutting some of its banks off the SWIFT financial network. Moreover, Russian President Vladimir Putin upped the ante on Sunday and put the country’s strategic nuclear forces on high alert.

This makes it prudent to wait for some follow-through buying before positioning for any meaningful upside. In the absence of any major market-moving economic releases, the market focus will remain clues to fresh headlines surrounding the Ukraine crisis. This will continue to play a key role in influencing the broader market risk sentiment and the USD price dynamics, which, in turn, should provide some impetus to the GBP/USD pair.

Technical levels to watch