Market Insider

GBP/USD: Sterling rebound in monthly closing.

GBP/USD rebounded further from Wednesday trend low at 1.2111, and flirted with key 10-DMA resistance at 1.2262 as a confluence of month-end position curating, U.S. inflation expectations and the potential U.S. government shutdown temper the dollar’s recent rise, though sterling still faces key challenges ahead.

Though dovish BoE rate expectations remain a threat to the pound’s nascent recovery, the more than six big-figure drop from late-August highs by 1.2750 was ripe for profit-taking as traders await the next round of inflation and employment data crucial to data-dependent central bankers.

Sterling’s recent gains on falling U.S. Treasury yields may be short lived. Front-end rate futures show larger price rises — lower rates — in both the euro zone and UK, versus the U.S. A look at IRPR on Eikon shows little change in Fed rate expectations, and lower BoE hike expectations, which should cap further GBP/USD gains.

Further, IMM positioning, as of last Friday’s release, had specs holding a net long of 33.7k contracts, which while off late-July’s highs near +64k is still relatively large and may cap gains as existing longs sell into future rises. If 10-DMA resistance gives way, GBP bulls will face more significant resistance at 1.2428, the 50% Fib of 1.2746-1.2111’s recent dip.

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