Sterling rose to a fresh six-week high versus a weak dollar on Friday, boosted by an unwinding of bearish bets in perceived riskier currencies on rising expectations EU leaders may move closer to resolving the euro zone debt crisis.
The pound was up 0.2 percent on the day at $1.5975, having risen to $1.6001 -- its highest since Sept. 9 -- in early trading. Traders cited bids above $1.6020 with near term resistance at $1.6048, its 100-day moving average.
On the downside, support is at around $1.5940 -- the 50 percent retracement of the move down from $1.6618 on August 19 to its 14-month low of $1.5270 hit on Oct. 6.
"We are seeing a bout of short covering that has helped sterling rise above $1.60 and the euro/dollar above $1.3950," said Sebastien Galy, currency analyst at Societe Generale.
"We should see the dollar coming under a bit more pressure as long positions are unwound and that should see sterling supported around the $1.60 area."
The pound gained along with the euro and global stocks on optimism European leaders will be able to hammer out a solution to the debt crisis over the next few days.
At a summit on Sunday, the EU neared an agreement on bank capitalisation and Germany and France came closer to a deal to leverage the euro area's rescue fund. .
As a result, traders said investors were paring back bullish bets built on the safe-haven dollar. According to data from the Commodity Futures Trading Commission, speculators were running net short positions of 53,226 in the week to Oct. 18, compared with 61,972 a week earlier .
"With the market still short, readjustment of positions will drive sterling in the very near term," said a spot trader in London. "But with QE looming, it will be a struggle to rise much and the rally could see more selling."
Many investors see limited upside for sterling in coming months after Bank of England policy minutes last week hinted that more quantitative easing may be needed to prop up the UK economy. QE involves flooding the market with pounds and increasing the central bank's balance sheet--a move which is usually bearish for the currency.
The euro was flat at 87.10 pence, having hit an 11-day low of 86.70 pence on Friday.
"While the UK is struggling, so is the euro zone. So there isn't much to choose between these two and we could see euro test the 86 pence level," added SG's Gely.
CMC said in a note that the single currency was struggling to hold near its recent highs at around the 87.90 area, and a break below the 86.50 pence area has the potential to see the euro retest this month's lows of 85.30 pence.
read more: Olympus Wealth Management
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