GBP/USD Analysis: Bulls seem non-committed amid UK leadership crisis

• A combination of supporting factors assisted GBP/USD to regain positive traction on Wednesday.
• Stronger UK CPI underpinned sterling and extended some support amid modest USD weakness.
• The UK political drama acted as a headwind and kept a lid on any meaningful upside for the pair.

The GBP/USD pair regained positive traction on Wednesday and stalled a three-day-old corrective slide from the very important 200-day SMA. The British pound was boosted by hotter-than-expected UK CPI, which accelerated to a 5.4% YoY rate in December or the highest level in nearly 30 years. The data reaffirmed bets for additional rate hikes by the Bank of England, which, along with the announcement to lift COVID-19 restrictions in the UK, acted as a tailwind for sterling. In fact, UK Prime Minister Boris Johnson told parliament that measures imposed to fight the surge in Omicron cases would be lifted next week, citing data that showed infections had peaked.

On the other hand, the recent US dollar recovery from over two-month low touched in reaction to the devastating US retail sales report on Friday stalled amid retreating US Treasury bond yields. This provided an additional lift to the major, though the UK political drama kept a lid on any meaningful upside. Demands for PM Johnson’s resignation over a series of lockdown parties in Downing Street turned out to be a key factor that held back traders from placing aggressive bullish bets. Nevertheless, the pair ended the day in the green and traded with a mild positive bias through the Asian session on Thursday amid a recovery in the risk sentiment.

There isn't any major market-moving economic data due for release from the UK on Thursday, leaving the pair at the mercy of the USD price dynamics. Later during the early North American session, traders will take cues from the US economic docket – featuring the releases of Philly Fed Manufacturing Index, Weekly Initial Jobless Claims and Existing Home Sales data. The market reaction, however, is likely to remain limited as investors might prefer to wait on the sidelines ahead of the FOMC policy meeting on January 25-26. In the meantime, firming expectations for an eventual Fed lift-off in March 2022 should act as a tailwind for the buck and cap the upside for the major.

Technical outlook

From a technical perspective, the overnight swing high, around mid-1.3600s, now seems to have emerged as immediate strong resistance. Some follow-through buying has the potential to lift spot prices back towards the 1.3700 mark. Any further move up might continue to meet with a fresh supply near the 1.3745-1.3750 region (200-DMA), which should act as a pivotal point and help determine the near-term trajectory.

On the flip side, the 1.3600 round-figure mark now seems to protect the immediate downside. A subsequent fall below would expose 100-day SMA support, currently near the 1.3545 region. This is followed by the 38.2% Fibo. level, around the 1.3525 area, which if broken decisively will suggest that the GBP/USD pair has topped out in the near term. The pair could then slide below the 1.3500 psychological mark and test the 50% Fibonacci retracement level of 1.3161-1.3749 strong move up, around the 1.3455 region.