HSBC strategists say that the US dollar seems to be about to rebound after a period of sustained decline, and they believe that the pound is particularly fragile.

Analysts from the bank stated in a strategy report that "lowering expectations of interest rate cuts by the Federal Reserve should allow the US dollar to regain some lost ground." They found that compared to fundamentals, the US dollar now looks cheap.

One of the fundamental factors that has been questioned is the significant shift in US interest rate expectations, with investors now leaning towards significant rate cuts in the coming months.

After Federal Reserve Chairman Powell's recent speech, the US dollar fell sharply, and he stated in his speech that the time has come to cut interest rates. In fact, the market is beginning to believe that there is an increasing possibility of a significant 50 basis point rate cut by the Federal Reserve in September, which will be an unusual and significant rate cut by the Fed outside of the crisis.

Daragh Maher, Head of US Foreign Exchange Strategy at HSBC, believes that the adjustment of the US dollar may have come to an end and points out two major reasons behind it.

Maher said, "Firstly, even if we accept the market's suggestion that the Federal Reserve may cut interest rates by 100 basis points before the end of the year, the US dollar looks too weak compared to these dovish interest rate expectations. Secondly, we believe that given the lack of evidence of an imminent economic recession and our belief that a 50 basis point rate cut will not lead to a 'soft landing,' the macroeconomic situation in the United States will not have a reason to adopt such a loose pace. Taking these two factors into account, as well as the fact that the US dollar index has returned to its low point in December 2023, we have reason to be bullish on the US dollar

Given the sensitivity of the pound to broader market sentiment, HSBC believes that a particular risk facing the GBP/USD is market selling, which is related to the Federal Reserve's commitment to a cautious interest rate cut cycle due to concerns about inflation reigniting.

HSBC said, "Compared to interest rates, the pound looks very strong, and its strength is mainly positively correlated with risk appetite. From the perspective of interest rates and risk appetite, this makes the pound vulnerable to the impact of the expected decline in US interest rate cuts. Overall, the GBP/USD has insufficient upward momentum above 1.30, and although holdings are not very extreme, we see downside risks

Daily chart of GBP/USD