Aug 27 (Reuters) - Gold's sharp rally, which has coincided with renewed pressure on the dollar, suggests the euro may have further room to rise.

Many investors have been betting against the euro, but it has continued to climb against the dollar, albeit more modestly than gold, raising the risk of a short squeeze if the rally gathers pace.

A short squeeze could lift EUR/USD speedily toward key topside levels before traders begin to establish significant bullish euro positions.

Unlike in January, when speculative euro longs rose to their second-highest level on record as EUR/USD reached a multi-year high of 1.2084, current positioning supports a bigger rise. Without the restraint of a large long position, EUR/USD could move well beyond 1.20. Although speculative long positions in gold have increased, they remain far below the levels seen when gold reached its record high in January, alongside EUR/USD trading at its best level of 2026. Gold, therefore, also appears to have room to extend its gains, giving traders holding numerous bets on a rising dollar pause for thought, as the U.S. currency usually falls when gold rallies.

From a technical perspective, EUR/USD has never closed above the 200-month moving average, currently at 1.1851, so a break above it would have very bullish implications for the pair. Should EUR/USD sustain a rise beyond 1.2016 — which is more probable following the substantial shift in positioning from long to short euros — a move toward 1.28 could follow.

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(Jeremy Boulton is a Reuters market analyst. The views expressed are his own)