The British Pound has outperformed many other G10 currencies so far this year. Economists at HSBC analyze GBP outlook.
Downside risks to domestic growth could curb GBP gains
Following June’s downside inflation, market pricing for the Bank of England’s (BoE) peak policy rate fell from 6.00% on 18 July to around 5.85% and GBP/USD fell below the 1.30 level (Bloomberg, 20 July 2023). Nevertheless, another 50 bps hike will no doubt remain up for debate at the 3 August meeting, but the pricing for ongoing hikes thereafter looks vulnerable and any adjustment lower will weigh on the GBP through the rate channel.
In addition, prior monetary tightening will only bite harder through time, and with fewer supportive disinflationary forces in Q4, there are downside risks to current economic resilience. While we remain bullish for the GBP in light of a broad USD decline, we are watching closely to see if such signs become more apparent as this could curb GBP gains. As such, we think that GBP/USD may find it hard to go much beyond the 1.30 level.
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