Synopsis:

HSBC argues that the recent 3% rally in GBP/USD has likely run ahead of fundamentals, driven more by external factors—a weaker US outlook and Germany’s fiscal stimulus—than by UK-specific developments. With the April US tariff rollout approaching and the UK labor market showing signs of softening, HSBC warns that GBP/USD is underpricing downside risks, particularly from wages and trade disruption.

Key Points:

1️⃣ GBP/USD Rally Not Driven by UK Fundamentals 🇬🇧

• The recent GBP surge was mainly driven by US weakness and European fiscal optimism, not domestic strength.

• UK-specific drivers remain in the background, but HSBC expects that to change soon.

2️⃣ Tariff Risks Still Loom Large for UK Economy ⚠️

• UK resilience to tariff headlines may not last—as a small, open economy, the UK remains vulnerable to global trade shocks.

• Europe’s focus on defense spending has distracted investors from broader trade risks.

3️⃣ Labor Market Softening Despite Lagging Official Data 💼📉

• Survey-based data (PMIs, REC/KPMG jobs report) point to slower labor demand and wage growth.

• ONS wage data, though still firm, lags trends by 3–6 months—weakness may surface soon, especially after April’s NI hike for employers.

4️⃣ GBP/USD Underprices Domestic Downside Risks 💷📉

• Current levels do not reflect growing risks to UK wage dynamics or trade exposure.

• As attention shifts back to domestic vulnerabilities, GBP/USD could face renewed pressure.

Conclusion:

HSBC views the recent strength in GBP/USD as overdone, driven more by external themes than UK resilience. With tariffs set to bite in April and underlying labor market softness likely to emerge, the bank believes the pound is vulnerable to correction. GBP/USD is underpricing key downside risks, especially from wages and trade, and could struggle to hold recent gains as investor focus realigns.