The greenback correction

"We had a view that many in the market had excessive speculative long dollar positions," Stretch told FX Week.

"Looking at a composite basket of major currencies versus the dollar (ex-Mexico) within the Commodity Futures Trading Commission (CFTC) report indicated that dollar longs had, in May, reached six-year highs."

"While the US data has proved to be dollar-supportive, the need to unwind such extended positions precipitated Rabo's anticipated greenback correction," he said.

"Although there has been discussion of all the dollar-bullish news being discounted, such as the scale and duration of Fed tightening, it has been the need to close out profitable positions into the summer lull that has driven sentiment," he said.

"Moreover, while dollar-long positions were overextended, the same could have been said for sterling, where the market, in our opinion, became overly stimulated by the prospects of an extended UK easing cycle.

"Over the past few weeks we have been looking for sterling to rebound back towards the 1.80 area, despite the market trading down below 1.73 on July 20."

Rabo looks to see a renewed rally in the dollar as the US sees continued expansion and widening short-rate spreads, according to Stretch. "We anticipate the Fed tightening until 4.50%, which will generate renewed buying interest once the market positioning obstacle has eased away," he said.