This is a time when positioning may actually help the pound to strengthen
The pound is among the better performers today as cable rises above the 100-hour MA (red line) in early trades before now contesting with the 200-hour MA (blue line) in European trading. It shows that buyers are poised to seize near-term control and a break above the 200-hour MA will allow them to do so and promote a move higher.
So, what gives for cable now? Why is the pound moving higher? Has anything changed on Brexit or UK politics?
The answer is that nothing has changed but I would argue that as markets are as jittery as they are now, haven flows may actually end up benefiting the pound.
The argument here is that in a normal market situation, the risks to the pound i.e. Brexit and UK politics are clear and that traders will capitalise on that as we have seen over the past few weeks. This is evident in the CFTC positioning for the pound:
The dip basically shows that traders are comfortable increasing their exposure to short pound positions but in times of heightened uncertainty and major risk-off sentiment, traders would much rather hold on to the likes of gold, yen and franc rather than anything else.
Hence, this could result in short covering of the positions held over the past few weeks. And in that regard, it could help promote some pound strength should the negative risk sentiment persist. However, I wouldn't get too caught up in chasing a move higher given all the uncertainty that still surrounds the currency.
As such, I'd rather take this opportunity to ease up on shorts and look to rebuild once the dust settles. Because looking at what's coming over the next few weeks for the pound, the Tory leadership contest will continue to be a bane for the quid rather than a boon.
