30.05.202214:44 Forex Analysis & Reviews: Dollar decline supports GBPUSD rally

The two-week GBPUSD rally, at first glance, looks like an unconditional victory for the bulls, who found the strength to go on the counterattack and take the pair's quotes out of the two-year bottom. But the main reason for the correction of the pound against the US dollar is the weakening dollar, while neither internal macro statistics, nor the conjuncture of the sovereign securities market are able to lend a shoulder to the sterling.

Expectations of a pause in the Fed's monetary restriction process and the resulting decline in US Treasury yields have turned the US dollar into a whipping boy. It is weakening against most major world currencies. At the same time, a 6% rally in the main stock indices in the United States during the week of May 28 and the lifting of a number of restrictions in China against the background of an improvement in the epidemiological situation in the country add fuel to the fire of a correction in the USD index from the area of 20-year peaks.

The pound simply took advantage of the situation, although given the restrained rhetoric of the Bank of England, the slowdown in the economies of China and the eurozone, the energy crisis, and the crisis in the cost of living, as well as the resuscitation of the Brexit topic, according to Nomura, it should be trading near $1.2.

Until recently, the GBPUSD bulls were supported by the FTSE 100, which has added more than 3% since the beginning of the year, which, against the backdrop of a 12% fall in the S&P 500 and more than 8% peak in the EuroStoxx 600, contributed to the flow of capital from North America and continental Europe to Britain. Alas, after the introduction of a 25% tax on excess profits of oil and gas companies, Bloomberg experts believe that the UK stock index has no growth potential, while its European counterpart is able to rise by 9% by the end of 2022.

Dynamics of P/E for European stock indices

For Britain, which is struggling to close the hole in the current account, the inflow of capital into the local securities market is of fundamental importance. Therefore, the fall of the FTSE 100 will certainly have a negative impact on the pound. As soon as interest in the US dollar begins to return, it is the GBPUSD bulls that will be the first to be hit.

Investors have now got it into their heads that the Fed, after two hikes in the federal funds rate in June and July, will pause in September. In fact, with financial conditions no longer tightening, Jerome Powell and his colleagues would rather continue what they started than stop. In addition, the futures market signals the desire of the Bank of England to sit on the sidelines. Futures contracts predict that the repo rate will peak in a year and then start to decline.

Expected dynamics of the REPO rate

Technically, despite the fact that the previous idea of buying GBPUSD above 1.246 and then building up longs on a break of 1.26 worked out with a bang, I recommend gradually taking profits as the pair continues to rally and think about a reversal and return to the downward trend. The reason for selling may be a rebound from the resistance at 1.268, 1.2715, and 1.275.

GBPUSD, Daily chart