GBP/USD retreats from two-month high, back below 1.3600 ahead of Fed's Powell

• GBP/USD struggled to capitalize on its intraday gains to the highest level since November.
• Fed rate hike bets acted as a tailwind for the USD and kept a lid on any meaningful upside.
• Traders also seem reluctant and moved on the sidelines ahead of Powell’s Senate hearing.

The GBP/USD pair surrendered a major part of its intraday gains and retreated back below the 1.3600 round-figure mark during the mid-European session.

Following the previous day's two-way/directionless price move, the GBP/USD pair attracted fresh buying on Tuesday and built on its recent strong gains recorded over the past three weeks or so. The momentum pushed spot prices to the highest level since November and was sponsored by a combination of factors.

The British pound continued drawing some support from hopes that the Omicron outbreak won't derail the UK economy. Moreover, UK Prime Minister Boris Johnson said on Monday that they are looking to reduce the quarantine period to five days from seven and making great progress in seeing off Omicron.

This, along with rising bets for additional rate hikes by the Bank of England, acted as a tailwind for the GBP/USD pair amid some intraday US dollar selling bias. The ongoing retracement slide in the US Treasury bond yields turned out to be a key factor that kept the USD bulls on the defensive.

Apart from this, a generally positive tone around the equity markets further undermined the safe-haven greenback. That said, the prospects for a faster policy tightening by the Fed helped limit the downside for the buck and kept a lid on any meaningful upside for the GBP/USD pair, at least for the time being.

It is worth mentioning that the money markets have fully priced in the possibility of an eventual Fed lift-off in March. The bets were further boosted by comments from Atlanta Federal Reserve President Raphael Bostic, saying that March would be a reasonable time for the first-rate increase.

Bostic added that the runoff of the balance sheet could begin soon after and expects three rate hikes in 2022, with risks pointing towards a fourth on the possibility of higher inflation. Hence, the focus will remain on Fed Chair Jerome Powell's confirmation hearing before the Senate Banking Committee.

Investors will closely scrutinize Powell's remarks for clues about the likely timing and the pace of policy normalisation. Apart from this, Wednesday's release of the US consumer inflation figures will play a key role in influencing the USD and provide a fresh directional impetus to the GBP/USD pair.

The mixed fundamental backdrop warrants some caution for aggressive traders, which, in turn, led to the GBP/USD pair's intraday pullback of nearly 35 pips. That said, the downside is likely to remain cushioned and more likely to attract fresh buying near the 100-day SMA, around mid-1.3500s.

Technical levels to watch