British Pound: Gradual Dollar gains into United Kingdom budget – HSBC

HSBC strategists highlight that GBP/USD is under pressure as resilient United States (US) data, a more hawkish Federal Reserve and narrowing UK-US rate differentials weigh on the British Pound (GBP). They note a relatively weak United Kingdom (UK) outlook versus the US and expect the Dollar to strengthen gradually against the Pound unless the upcoming UK Budget delivers a positive surprise.

Cyclical drivers weigh on Pound

"GBP was largely unmoved against both the USD and EUR by UK Prime Minister Andy Burnham’s keynote speech to the Labour Party conference on 29 September. The speech set out a broad long-term vision for the economy, including greater regional devolution and energy market reform, but provided little detail on either the economic growth or fiscal strategy ahead of the Budget on 28 October."

"The lack of an immediate market reaction is telling. Investors appear more focused on the forces currently driving GBP/USD such as resilient US economic data, a more hawkish FOMC, and the narrowing support provided by UK-US interest-rate differentials. GBP/USD has fallen this month to its lowest level since June, with the US side of the equation doing much of the work."

"The UK backdrop remains less supportive, with HSBC Economics expecting growth to slow and a cautious Bank of England ahead of its 5 November meeting."

"Markets are pricing around 21bp of tightening for November but that is heavily dependent on energy markets and the Middle East."

"For GBP/USD to find greater domestic support, the budget will need to provide a positive surprise. Burnham’s proposals may eventually support GBP if they improve productivity, unlock regional investment and raise the UK’s growth potential."

"Until the government clarifies how it will manage public debt while encouraging private sector expansion, GBP/USD is likely to remain governed by cyclical factors. The 28 October Budget may reveal more details but US data, Federal Reserve policy and energy prices are likely to set the tone for GBP/USD. We expect the USD to strengthen gradually against the GBP in the near term."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)