Sterling is poised for a period of heightened volatility as traders weigh significant geopolitical risks against a heavily short-positioned market that could be ripe for a squeeze.

The dollar has caught a fresh bid today following the announced U.S. blockade of the Strait of Hormuz, a move that sent oil prices surging and bolstered the greenback while leaving traditional safe havens like the yen, Swiss franc and gold relatively weaker. Despite this current pressure, the pound had recently trended higher on the back of previously upbeat Middle East negotiations.

Crucially, sterling net speculative IMM positioning has remained remarkably steady over the last few weeks at around -55,000 contracts. Given the sheer size of this net short position, any positive turn in reports regarding Middle East tensions and an ensuing risk rally is likely to lift GBP/USD, putting late-February highs near 1.36 back into focus.

However, sterling bulls would still have to contend with lingering UK fiscal concerns, which remain a persistent headwind as the domestic inflation and growth outlook remains notably challenging.

Technically, the pair is currently battling resistance at the falling daily cloud base at 1.3454. A sustained move into the daily cloud, spanning 1.3454-1.3561, would open the door toward the upper Bollinger Band at 1.3509 and the daily cloud top. Conversely, initial support sits at the 200-day moving average of 1.3414, followed by today's Hormuz-related blockade flash low at 1.3383. Failure to hold this level may lead to a test of the 21- and 10-DMAs just ahead of 1.33, marking a shift in the near-term bias.
Sterling Chart:


(Paul Spirgel is a Reuters market analyst. The views expressed are his own)