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HSBC updates its pound sterling forecast profile at the mid-year point.
The pound has weathered a series of shocks in recent months, but HSBC warns that its resilience will face a sterner test as political uncertainty returns to the UK.
The bank notes that GBP/USD has emerged from the Middle East conflict largely intact, despite a surge in oil prices and lingering concerns about global energy supplies.
Historically, such periods of uncertainty have tended to weigh on sterling.
This time has been different because favourable interest rate dynamics, strong global risk appetite and changing liquidity conditions have helped support the currency, shows a new analysis from the UK-based global lender.
"The Middle East conflict has tested the resilience of GBP-USD. So far, it has emerged largely unscathed, but clouds continue to gather," says the analysis.
Underpinning pound sterling are international developments that have been more important than domestic factors, as HSBC argues that since last year’s Autumn Budget, GBP/USD has been trading in what it calls “phase one”, where traditional market drivers such as risk sentiment, interest rate expectations and, more recently, oil prices have dominated.
"In short, international factors rather than UK specific ones matter most."
That has generally worked in sterling’s favour.
The ceasefire between the United States and Iran helped lift global risk appetite, pushing equity markets higher and allowing GBP/USD to recover above levels seen before the conflict.
HSBC says risk sentiment has become the dominant force behind the pair, with sterling tending to benefit when oil prices fall and investors become more willing to take risk.
The pound has also found support from interest rate markets.
Stronger-than-expected UK economic data before the Iran conflict prompted investors to scale back expectations for Bank of England rate cuts, helping preserve sterling’s yield advantage.
In addition, HSBC highlights a less obvious source of support.
The Bank of England’s quantitative tightening programme has reduced the supply of sterling liquidity in financial markets, a development that may be providing an additional buffer for the currency through cross-currency funding markets.
But the bank cautions that the current environment may not last indefinitely.
While international developments remain the dominant driver, HSBC warns that renewed concerns about UK policymaking could quickly re-emerge.
“We cannot ignore emerging policy uncertainty.”
The report points to growing pressure on the Prime Minister from within the Labour Party and notes that sterling has previously struggled when investors become concerned about fiscal discipline.
The bank invokes the experience of the Truss administration as a reminder that bond markets can become an important constraint on government policy.
“If leadership challengers heed the lessons of history when it comes to the UK Gilt market, other factors should prove more important for GBP in the coming months.”
Updated Forecasts
For now, HSBC believes global risk sentiment remains the crucial variable for GBP/USD.
As long as investors remain comfortable taking risk and oil prices remain contained, the pound can continue to find support.
However, a deterioration in global sentiment or a resurgence of domestic policy concerns could expose a currency that has so far proven more resilient than many expected.
The pound to dollar exchange rate is forecast at 1.35 by the end of September, a level that holds through to year-end.
The pound to euro exchange rate forecast sits at 1.14 through the same period, implying the pair will trend towards the lower end of the long-running 2025-2026 range.