The fading dollar bid may present an opportunity for sterling bulls to push through resistance at the falling 21-DMA, which has capped it in recent days, and potentially mount an assault on the 200-DMA at 1.2820.

Rate differentials with the U.S. don't justify the degree of recent sterling selling and short positions against the pound might grow nervous as the illiquid period surrounding year-end approaches.

Traders will look to Friday's U.S. payrolls report and Dec. 11 CPI data for clues about the Fed's policy path, which could lead to position adjustments before the FOMC's Dec. 18 meeting, after which volumes are likely to diminish.

There may also be an opportunity, for those bold enough, to reenter long sterling positions after bulls were drubbed in the wake of the U.S. election.

GBP net spec positioning has dropped to +21.4k contracts, its lowest level since May 28. While Fed rate cut expectations have diminished considerably since May, the U.S. central bank is expected to be slightly more dovish than the BoE in early 2025, which may help boost GBP/USD.

A close above the falling 21-DMA would put 1.2761, the 50% Fib of 1.3046-1.2475, in focus. Above there, the 200-DMA and early-November highs above 1.30 may become levels to watch.

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

((paul.spirgel@thomsonreuters.com))