GBP/USD Forecast: Imposition of third lockdown in UK could cap the upside

• A combination of factors prompted aggressive selling around GBP/USD on Monday.
• The imposition of stricter lockdowns in the UK weighed heavily on the British pound.
• A pullback in US equities benefitted the safe-haven USD and contributed to the slide.

The GBP/USD pair witnessed a dramatic turnaround on the first trading day of 2021 and retreated over 160 pips from the 1.3700 mark, or fresh 32-month tops. The early positive move was exclusively sponsored by sustained US dollar selling bias and seemed rather unaffected by concerns about the exclusion of the UK services sector from the Brexit agreement. That said, worries about an unprecedented level of COVID-19 infection in the UK kept a lid on any further gains for the major, rather prompted some aggressive selling at higher levels. In fact, infections rose by a record 58,784 on Monday, marking the seventh-straight day of more than 50,000 new confirmed coronavirus cases.

The intraday selling bias aggravated further after UK Prime Minister Boris Johnson imposed a third national lockdown until mid-February to curb the continuous surge. The move was predicted to slow the economic recovery and prompt the Bank of England to ease monetary policy further, which, in turn, took its toll on the British pound. Apart from this, doubts about the effectiveness of vaccine on a new coronavirus strain coming from South Africa and uncertainty about the runoff elections in Georgia tempered enthusiasm. This was evident from a sharp pullback in the US equity markets, which helped revive demand for the safe-haven greenback and further contributed to the pair's intraday slide.

The pair dived to levels below mid-1.3500s, albeit lacked any strong follow-through selling. The pair managed to regain some positive traction during the Asian session on Tuesday amid the emergence of some fresh USD selling. There isn't any major market-moving economic data due for release from the UK. Meanwhile, the US economic docket highlights the release of ISM Manufacturing PMI. This, along with developments surrounding the coronavirus saga and the broader market risk sentiment, might influence the USD price dynamics and assist investors to grab some meaningful trading opportunities.

Short-term technical outlook

From a technical perspective, the overnight sharp pullback stalled near 200-hour EMA. The mentioned support is currently pegged near the 1.3550 region, which should now act as a key pivotal point for intraday traders. A sustained break below might prompt some technical selling and accelerate the slide further towards the key 1.3500 psychological mark. The latter coincides with the 38.2% Fibonacci level of the 1.3188-1.3704 strong move up. Failure to defend the mentioned support levels should pave the way for an extension of the corrective slide.

On the flip side, any move back above the 1.3600 mark might now confront resistance near the 1.3645-50 region. Some follow-through buying could negate prospects for any further decline and assist bulls to make a fresh attempt to conquer the 1.3700 mark. The momentum could further get extended towards the 1.3780-85 intermediate resistance before the pair eventually aims to reclaim the 1.3800 mark.