GBP/USD spikes to three-day tops, around 1.3825 region

• GBP/USD gained strong positive traction for the second successive day on Tuesday.
• BoE rate hike expectations, fresh USD selling bias provided a goodish lift to the pair.
• Hawkish Fed, Brexit jitters might keep a lid on any meaningful upside for the major.

The GBP/USD pair surged past the 1.3800 mark during the first half of the European session and shot to three-day tops in the last hour. The pair was last seen trading around the 1.38125 region, up nearly 0.40% for the day.

The pair built on the previous day's rebound from the vicinity of ascending channel support and gained strong positive traction for the second successive day on Tuesday. The dominant risk-on mood prompted fresh selling around the safe-haven US dollar, which, in turn, was seen as a key factor that provided a goodish lift to the GBP/USD pair.

On the other hand, the British pound continued drawing some support from the recent hawkish remarks by the Bank of England officials, signalling an imminent interest rate hike this year. In fact, the BoE Governor Andrew Bailey had said that the UK central bank will have to act soon amid increasing risks to medium-term inflation expectations.

The money markets suggest a 62% chance that the MPC will hike rates by 25 bps at the upcoming BoE monetary policy meeting next week. Apart from this, the sterling further benefitted from some cross-driven strength stemming from a fresh leg down in the EUR/GBP pair, which tumbled to the lowest level since February 2020 on Tuesday.

That said, a fresh row over the Northern Ireland protocol might hold bulls from placing aggressive bullish bets around the GBP/USD pair. This, along with the prospects for an early policy tightening by the Fed, might further collaborate to cap the upside amid absent relevant market moving economic releases from the UK.

Meanwhile, the US economic docket releases of the Conference Board’s Confidence Index, Richmond Manufacturing Index and New Home Sales later during the early North American session. This, along with the US bond yields and the broader market risk sentiment, will influence the USD price dynamics and provide some impetus to the GBP/USD pair.

Technical levels to watch