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Data shows more investors are now betting on falls in Pound Sterling than are betting on gains, for the first time since December.

But this shift in positioning could eradicate headwinds to future climbs, especially if a trend in falling Covid cases in the UK is confirmed this week.

The latest weekly data from the Commodities Futures Trading Commission - which offers the largest reliable snapshot on investor positioning - showed that investors now hold a net bet against the British Pound, having held a net bet for appreciation for much of 2021.

The size of this bet amounts to USD298MN, built largely as investors kept their longs intact but increasing shorts by 10K contracts.

"Speculators turned net short GBP for the first time since last December. This unwinding lowered GBP/USD from 1.42 at the start of June to 1.37 last week," says Philip Wee, FX Strategist at DBS Bank.

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The British Pound fell sharply at the start of the previous week amidst a global market selloff linked to the global rise of the Covid-19 Delta variant, a move that confirmed the UK currency remains sensitive to broader risk trends.

But the domestic picture has also deteriorated as the UK experiences a third wave of Covid-19 cases that has resulted in millions of people being asked to self-isolate while triggering a deterioration in business and consumer confidence.

"Investors have moved net short of GBP for the first time since December," says Jeremy Stretch, Head of G10 FX Strategy at CIBC Capital Markets. "Question marks over the broad recovery narrative have accelerated in line with the rise in Covid cases across the bulk of the month."

Positioning data is often regarded by analysts and traders as a counterintuitive signal in that when the market gets too heavily invested in a position a counter-trend rebound becomes likely.

Investors have betted heavily in favour of Sterling gains for much of 2021 and the popularity of the trade was in fact one of the greatest headwinds blowing against further gains in the Pound.

But with these headwinds now removed positioning is no longer seen as a barrier to a rally in the currency.

"GBP lacks the deep net short positions (driven by hard Brexit fears) that pummelled it to 1.20 in 2018-2019. Given the relatively flatter gross positions throughout the pandemic, GBP will probably consolidate in a higher 1.35-1.40 range for now," adds Wee.

According to Crédit Agricole's FX positioning gauge overall positioning on the Pound is back to fully balanced territory.

"This implies any upside from here in pairs such as GBP/USD will be largely driven by the USD angle. However, we note that some caution is warranted ahead of the Fed which offers some hawkish surprise potential," says Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole.

The investment bank says their positioning-based model remains in favour of buying pairs such as AUD/USD and GBP/USD. "we have entered a long position in GBP/USD with a target of +3% and a stop-loss of -1.5%," says Marinov.

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A trigger to a rebound in the Pound could lie with confirmation that the decline in Covid cases seen in the UK over recent days turns into a more durable trend.

Cases have been falling in the UK for five days and should data out this week confirm the peak of the third wave is in confidence amongst investors, businesses and consumers will likely pick up over coming weeks.

Indeed, Stretch says whether investors increase bets on the Pound could depend on whether the fall in UK Covid cases stalls, suggesting the run of recent good data was a temporary phenomenon.

Although GBP/USD may have regained the 200day MAV, currently 1.3719, Stretch says he would expect the level to be threatened should the recent (5 day) downtrend in Covid cases stall or UK retail activity moderate.

"Expect any near term GBP gains to be capped around 1.3790/3800, we would look to fade any such gains," says Stretch.