LONDON (Reuters) -The British pound edged higher against a faltering U.S. dollar on Monday and was set for its first monthly gain in five as the risk-sensitive currency benefited from improving sentiment.
As markets have readjusted their rate hike expectations from the Federal Reserve lower, the dollar index has weakened over 3.5% from its mid-May peak. This helped lift sterling after it reached its lowest level since March 2020 earlier in the month.
"The rebound in GBPUSD largely reflects USD depreciation," said Vasileios Gkionakis, EMEA head of CitiFX G10 strategy, who remains bearish on sterling against the euro and commodity FX, citing weakening growth, depleting household savings, absence of meaningful fiscal stimulus and a likely resurfacing of Northern Ireland protocol-related headlines.
The trading range was relatively narrow through Monday as U.S. stock and bond markets were closed for the Memorial Day public holiday, while the British calendar is looking light this week with markets closed on Thursday and Friday for the Spring Bank Holiday and Queen's Platinum Jubilee.
At 1358 GMT, the pound was up 0.1% against the dollar at $1.2640, just off Friday's monthly high of $1.26665.
Against the euro, sterling was down 0.2% at 85.15 pence.
Despite sterling's recent recovery against the dollar, data on Friday released from the Commodity Futures Trading Commission (CFTC) showed investors slightly added to their sterling net short position in the latest week.
The net short position now stands at $6.3 billion, the largest short since 2019.
Analysts are increasingly bearish on sterling given signs of a weakening economy and as the Bank of England continues to raise interest rates in an attempt to bring down inflation.
"Hiking rates against a sharply slowing economy is never a good look for any currency," Bank of America FX Strategist Kamal Sharma said in a research note.
"An alleviation of the current risk off environment and fiscal stimulus may provide some relief but the damage has been done and the outlook for GBP looks grim," Sharma added.
(Reporting by Samuel Indyk; Editing by Toby Chopra and Alison Williams)