GBP/USD flirts with daily low, around 1.3225-20 region amid renewed USD buying interest

• A combination of factors prompted fresh selling around GBP/USD on Monday.
• COVID-19 jitters dashed hopes for a BoE rate hike and weighed on the sterling.
• Hawkish Fed expectations underpinned the USD and added to the selling bias.

The GBP/USD pair remained depressed through the early part of the European session and was last seen hovering near the daily low, around the 1.3225 region.

The pair struggled to capitalize on last week's goodish recovery move from a one-year low, around the 1.3060 area and opened with a modest bearish gap on Monday. The British pound was undermined by news that the UK Prime Minister Boris Johnson could impose additional COVID-19 restrictions. Last week, Johnson advised people to work from home and mandated the use of vaccine passports in large venues.

Separately, the UK health secretary, Sajid Javid, reaffirmed this Monday that the Omicron coronavirus is spreading at a phenomenal rate and around 40% of infections in London involve the new variant. The latest developments surrounding the coronavirus saga forced investors to push back their expectations about an imminent interest rate hike by the Bank of England in December and undermined the sterling.

On the other hand, the US dollar regained positive traction amid growing market acceptance that the Fed would adopt a more aggressive policy response to contain stubbornly high inflation. The market bets were reaffirmed by the data release on Friday, which showed that the headline CPI accelerated to the highest level since 1982 in November and the core CPI recorded the sharpest rise since mid-1991.

Investors, however, might refrain from placing aggressive bets, rather prefer to wait on the sidelines ahead of this week's key central bank event risks. The Fed is scheduled to announce its policy decision on Wednesday, which will be followed by the BoE meeting on Thursday. The outcome will play a key role in determining the next leg of a directional move for the GBP/USD pair.

Hence, it remains to be seen if Monday's downtick marks the resumption of the prior bearish trend or attracts some buying at lower levels amid absent relevant market moving economic releases. Nevertheless, the GBP/USD pair's inability to gain any follow-through traction and the emergence of fresh selling suggests that the recent downward trajectory might still be far from being over.

Technical levels to watch