The GBP has been among the best performing G10 FX currencies since the start of the week. We stressed previously that the currency has room to appreciate towards the higher end of this year’s range, mainly on the back of position squaring.
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Somewhat stabilizing expectations as when it comes to the June EU referendum seems to increase uncertainty among all those who are short the currency. It must be noted that according to our positioning gauge, short positioning remains quite elevated. It must be noted too, that medium-term inflation expectations as measured by 5y forward breakeven rates have been rising of late, irrespective of the stronger currency.
One may conclude that somewhat lower expectations as when it comes to a Brexit (for instance reflected in lower CDS) put the focus back to constructive domestic conditions. Stabilizing commodity price developments combined with firm domestic conditions may well make a case of a further improving price outlook and that should ultimately drive rate expectations higher too.
Indeed, rate expectations have been starting to rise already. It is still early days and real demand is unlikely to return until a positive outcome in June. However, there is more room of short-covering related upside.