Pound Sterling "Finely Balanced" Against Euro & Dollar

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The British Pound should see its selloff against the Dollar pause, and it is unlikely to hit fresh highs against the Euro before year-end.

This is according to an assessment of the Pound's near-term prospects made by HSBC.

"The GBP is finely balanced," says a strategy note from HSBC Bank. "The UK finds itself between a strong US economy and a struggling Eurozone, leaving both GBP-USD and EUR-GBP testing lows."

HSBC's playbook expects USD strength in 2025 and EUR weakness, but from a tactical perspective, it thinks the USD has done enough for now. "We expect GBP-USD will not extend moves much below 1.26," says HSBC.

This can allow the Pound to Dollar exchange rate some space to breathe following a significant selloff.

The Dollar soared in November, boosted by a combination of strong U.S. economic data and expectations for USD-supportive policies under the Trump administration.

At the same time, the Pound to Euro exchange rate (GBP/EUR) was supported above 1.19 amidst deteriorating sentiment towards the Eurozone and fears that Trump's tariff plans will be particularly damaging to the Eurozone.

HSBC thinks the UK finds itself between a strong U.S. economy and a struggling Eurozone, leaving both GBP/USD and EUR/GBP testing lows (GBP/EUR testing highs).

"The GBP is close to its strongest in the post-2016 Brexit period (against the EUR), with EUR-GBP hovering close to 0.8300. However, without a strong fundamental trigger, we expect these levels to hold near term," says HSBC.

"In short, the GBP is strong against the EUR but weak against the USD, reflecting the UK’s mid-Atlantic drift with high inflation and low – but at least relatively stable – growth. The UK shares neither US optimism for fast-paced, fiscally stimulated growth, nor the same fears of political fragmentation, economic deterioration, and exposure to US tariff threats as the eurozone," says HSBC.

The Bank of England is expected to maintain a gradual approach to cutting interest rates, which can underpin Pound Sterling, say analysts.

Although the 2025 outlook points to further GBP/USD weakness and GBP/EUR strength, the remainder of 2024 could see some reversion from the bigger trends.

HSBC thinks GBP/USD is unlikely to see a decisive break below 1.2600, but warns if this were to happen, it would confirm the end of the uptrend in place since Q1 2023, and might allow momentum to build.

GBP/EUR is expected to be capped below 1.2050 for now.