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Investing.com -- HSBC (LON:HSBA) has revised its forecast for the British pound against the US dollar, citing recent gains driven by broader euro strength.
GBP-USD recently touched its highest level since November, benefiting from the rally in EUR-USD. However, despite the short-term boost, the UK faces economic headwinds that could limit further gains.
The UK's decision to boost defence spending and invest in European neighbours is expected to have a favorable impact on the country's economy.
However, the Global Head of FX Research at HSBC Paul Mackel noted that the UK’s defence sector remains relatively small, contributing just 1.7% of total exports and 0.5% of GDP in 2023. Broader economic growth remains stagnant, while government fiscal constraints limit room for stimulus.
"The UK faces other challenges. Economic growth continues to stagnate and government faces fiscal constraints. Sticky wage growth and services inflation have kept monetary policy restrictive but, with weakness in labour market data showing up in surveys, the risks around the BoE’s cutting cycle are tilted to the downside," according to Mackel.
He also added that the broader growth or inflation dynamics do not look positive for GBP. It tends to underperform during high uncertainty.
With US tariff policies creating instability in global trade, HSBC expects downward pressure on GBP-USD. The bank forecasts GBP-USD at 1.23 by the fourth quarter of 2025.
