08.06.202013:38 Forex Analysis & Reviews: The pound let go of its fears

At first glance, the best week for the pound since the beginning of spring and the first increase in GBP/USD above 1.27 since March look paradoxical. Britain is facing the worst death rate from COVID-19 in Europe, its economy is at risk of sinking by the maximum amount in three centuries, the Central Bank is talking about negative rates, and only a madman believes that London and Brussels will soon conclude a deal within the framework of Brexit. The rally of the analyzed pair could be attributed to the weakness of the sales plunging amid the improvement in the global risk appetite for the US dollar, but the pound is strengthening against the euro, inspired by a large-scale stimulus.

In fact, the markets are rising on expectations and fall on the facts. There was a lot of negativity in the quotes of GBP/USD: the pandemic, the inconclusive Brexit, and negative rates. Hedge funds have been building up net shorts in sterling for five straight weeks, and as soon as signs began to show that the reality would not be so bleak, they began to actively contract. According to Andrew Hauser, BoE's Executive Director for Markets, a repo rate drop below zero will not happen in the near future. Hauser may not be a voting member of the monetary policy committee, however, the money market no longer insists on negative borrowing costs. Back in late spring, it signaled that this would happen before the end of 2020, but now expectations have shifted to the beginning of 2022.

Ahead of the EU summit on June 11-12, Boris Johnson has three options: prolong the transition period, ask the EU to conclude a deal by October, and not prepare for a deal. It seems that the British government has chosen the third: according to its estimates, the average tariff with non-EU countries will fall after the divorce from 7.2% to 5.7%. If trade agreements are concluded with other states, it may even fall to 3%. Yes, the European Union is the main partner of the Foggy Albion, however, the situation does not look disastrous. The pound's rise to $ 1.27 may indicate that investors have got rid of fears of a no-deal Brexit. Reducing uncertainty is more important for them than divorcing London and Brussels without a treaty.

A significant contribution to the GBP/USD rally is the desire of market players to get rid of safe-haven assets. According to Citi, the USD index has broken the "bullish" trend and is moving to a long-term (5-10 years) "bearish" trend against the backdrop of growing global risk appetite, low Fed rates, expansion of its balance sheet and lagging dynamics of US GDP compared to its global counterpart.

Dynamics of GBP/USD and the Dow Jones index

Interest in the dollar may still return due to the resumption of trade wars, the second wave of COVID-19, or due to the US presidential election, however, until this happens, it makes sense to use the GBP/USD pullbacks with the subsequent rebound from the support at 1.258, 1.2485 and 1.24 for purchases.

Technically, these marks are the corrective levels of 23.6%, 38.2%, and 50% of the wave 4-5 of the "Expanding Wedge" pattern. As a rule, their unsuccessful assault leads to the resumption of the upward trend.

GBP/USD, the daily chart