Synopsis:

HSBC notes the GBP’s dual dynamics, with strength against the EUR but weakness against the USD, reflecting its unique position in the G10 landscape. Persistent inflation and cautious Bank of England (BoE) policy support the GBP, but a decisive move in GBP/USD below 1.2600 could signal further declines.

Key Points:

• GBP/USD Outlook:

  • GBP/USD has declined 2.6% over the past month, driven by USD strength from US-specific events.
  • The pair is testing the June lows and the 200-day moving average, with a potential break below 1.2600 signaling the end of the uptrend since Q1 2023.
  • Despite the recent drop, HSBC expects GBP/USD to hold near 1.2600 without a strong fundamental trigger.

• EUR/GBP Outlook:

  • The GBP remains strong against the EUR, trading near its post-2016 Brexit highs, with EUR/GBP hovering around 0.8300.
  • Persistent UK inflation and a relatively stable economic outlook compared to the eurozone’s challenges, such as tariff risks and political fragmentation, support GBP strength against the EUR.

• BoE Policy and Inflation:

  • Persistent inflation limits the scope for BoE easing. October CPI data showed a rise to 2.3% YoY for headline inflation and 5.0% for services CPI.
  • The BoE remains cautious due to geopolitical tensions, the US presidency’s impact, and fiscal policy uncertainties.
  • Despite some dovish signals, including the addition of Alan Taylor to the MPC and Catherine Mann’s conditional readiness to support rate cuts, no significant policy shifts are expected before year-end.

• Market Positioning and Sentiment:

  • Futures data indicates net long GBP positions, suggesting some market optimism.
  • HSBC expects GBP/USD to stabilize around 1.2600 and EUR/GBP to remain above 0.8300 in the near term.

Conclusion:

HSBC foresees GBP/USD holding near 1.2600 and EUR/GBP above 0.8300 through the end of the year. Persistent UK inflation and cautious BoE policy provide underlying support for the GBP, but further downside in GBP/USD could emerge if 1.2600 decisively breaks.