Can it be anything more than short-covering? Can people really be buying the pound out of want rather than need regardless of what the rest of the currency universe does?

For months, the dollar and pound pound traded inversely. The financial crisis boosted the dollar because the world was awash in dollar-denominated credit and it needed to deleverage, pronto. The pound was hammered because of the UK’s over-reliance on financial services.

Then they traded inversely as the deleveraging trade was overtaken by the reflation trade; the most beaten up currency became the market darling. The pound soared and the dollar weakened. Fair enough.

Now, we’re more than three months into the reflation trade. The pound is 30 cents above its trend lows from January and nearly 15 cents below the EUR/GBP high from December of last year.

Recent IMM data indicates the market is finally square in GBP after being short forever. I guess this tells us we have room to run. As much as I would like fade the strong pound trend, a return to pre-Lehman levels of 0.79/80 and 1.70/1.75 can’t be ruled out.

So much for cheap UK labor…EUR/GBP trades now at 0.8425 and cable at 1.6435.