Currency markets have pushed the British pound higher this week amid what ING analyst Chris Turner describes as a short-covering squeeze. Turner attributes the move to asset managers who were holding sizable short positions in GBP/USD that became vulnerable after the recent sell-off in the dollar.
ING's assessment places GBP/USD in the high 1.36s to low 1.37s, levels Turner suggests could be the upper bound for both the current quarter and potentially for the year as a whole. That view frames the recent gains as possibly transient rather than the start of a sustained upswing.
Beyond the mechanics of short covering, Turner and ING highlight several sources of potential downward pressure on sterling over coming months. Domestic political events are singled out as a key vulnerability. A by-election scheduled for February 26 is described as critical: if the Labour Party were to lose the seat to Reform, the outcome could increase pressure on Prime Minister Starmer. That pressure could, ING notes, contribute to intensified speculation about leadership change following the results of local elections in May.
ING also points to external drivers that could reverse sterling's recent gains. The pound remains exposed to moves in bond markets overseas, specifically those in Japan or the United States, which could create headwinds for GBP/USD. Taken together, ING judges sterling to be approaching the upper limit of its multi-quarter trading range rather than breaking into a new structural trend.
Market participants therefore face a mix of technical and fundamental considerations. On the technical side, significant short positions that were forced to cover have helped lift the currency in the near term. On the fundamental side, political uncertainty in the UK and sensitivity to international bond-market dynamics leave sterling susceptible to renewed weakness.
Note: This report relays ING's market view as described by analyst Chris Turner and does not introduce any additional forecasts or data beyond that assessment.