ING’s Chris Turner highlights a powerful short squeeze in Sterling, triggered by reports that Shabana Mahmood could become Andy Burnham’s chancellor, a choice seen as less fiscally expansive. Speculators had held their shortest Pound positions since 2017, and Turner sees scope for EUR/GBP to test 0.8400 after a sustained break of 0.8470, with GBP/USD eyeing 1.3600–1.3650.

Short squeeze drives Sterling higher

"The sterling short squeeze continues. The catalyst for EUR/GBP to break below 0.8500 yesterday was reports that Shabana Mahmood would be Andy Burnham’s pick for chancellor when he likely comes to power next week. Mahmood is seen to the right of the Labour Party and a less divisive – and potentially less fiscally expansive – candidate for chancellor than Ed Miliband. 10-year UK gilts outperformed German Bunds by around 5bp yesterday."

"The strength of the sterling rally looks more a function of position adjustment rather than a massive re-assessment of the prospects for UK PLC, however. Positioning data from US futures exchanges had recently shown speculators running the shortest sterling positions since 2017."

"It may be difficult to stand in the way of the sterling rally in the short term, where a sustained break of 0.8470 opens up 0.8400 for EUR/GBP, while GBP/USD could make a run at 1.3600/3650. And next week looks a big one for UK inputs, with Burnham taking the reins and both CPI and jobs data released."

"Yet when position-adjustment activity fades and investors return to the UK macro/Bank of England story, EUR/GBP should be able to retest the recent break-out area around 0.8600/8610. That may be a story for much later this month."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)