Original Article by James Leonard, sourced from ExchangeRates.org.uk
Title: HSBC Forecasts: GBP/USD Could Face Downward Pressure Toward 1.37 by 2026
In a recent analysis by HSBC, one of the world’s leading financial institutions, projections for the British Pound to US Dollar (GBP/USD) exchange rate indicate potential downward movement through to 2026. The forecast outlines concerns regarding the resilience of the US dollar, UK economic headwinds, and global macroeconomic dynamics. HSBC’s year-end forecast for 2025 suggests the GBP/USD rate could weaken to 1.38, with further depreciation to around 1.37 by 2026.
The analysis reflects HSBC’s perspective on both the cyclical and structural elements that may influence the pair’s performance over the coming year.
Overview of HSBC’s GBP/USD Forecast
HSBC’s research suggests that the pound faces several hurdles that could impede its performance against the US dollar. While the UK economy is expected to inch forward, macroeconomic pressures and lingering inflation concerns are likely to keep the British currency under pressure. Meanwhile, the US dollar’s appeal as a safe haven and a high-yielding currency might remain strong over the forecast period, particularly given uncertainties around global economic growth and monetary policy divergence between the Bank of England (BoE) and the Federal Reserve (Fed).
Key points from HSBC’s projections include:
– 2025 year-end target for GBP/USD: 1.38
– 2026 year-end target for GBP/USD: 1.37
– Near-term downside risks outweigh upside potential for the pound
– Relative monetary policy settings between the BoE and the Fed remain critical to FX valuation
HSBC’s Rationale Behind the Forecast
The forecast rests on several core assumptions tied to economic performance, monetary policy, global risk sentiment, and market positioning.
1. Divergence in Central Bank Policies
HSBC notes that the Federal Reserve is expected to maintain higher interest rates for a longer period than the Bank of England. This “higher-for-longer” stance supports the US dollar’s yield advantage and keeps capital flows tilted toward the greenback, especially amid global economic uncertainty.
– The Federal Reserve’s monetary policy is likely to be more hawkish than the BoE’s during the forecast period.
– Inflation in the US, though trending lower, remains sticky, discouraging aggressive rate cuts.
– The Bank of England is expected to cut rates more quickly in response to weaker UK economic performance and softer inflation data.
This divergence causes downward pressure on the GBP/USD rate because currency investors tend to favor higher-yielding assets in stable economic jurisdictions. With the Fed expected to maintain a relatively higher yield environment, demand for dollar-denominated assets may continue to grow relative to GBP assets.
2. UK Economic Growth Outlook
HSBC expresses concern about the UK’s medium-term growth potential. While GDP is likely to avoid a deep recession, the economy is forecasted to underperform compared to both historical standards and international peers.
– Stagnating productivity and weak investment levels are structural challenges to UK growth.
– Household real incomes have only modestly improved following energy price shocks in 2022 and 2023.
– Government borrowing costs and fiscal constraints may limit the government’s ability to foster economic growth through expansive policies.
With poor productivity growth and limited fiscal space, HSBC believes the UK’s economic trajectory does not provide a compelling backdrop that would support a stronger pound.
3. US Dollar Fundamentals Remain Strong
HSBC highlights that the US dollar is not only benefiting from relative yield advantages but also from persistent global demand for safe-haven assets. Despite hopes in financial markets that the dollar might weaken in 2024 or beyond, the currency has proven resilient.
Reasons cited for this include:
– The continued perception of the US dollar as the dominant global reserve currency.
– Structural current account deficits that are largely funded via capital inflows due to the dollar’s status in the global financial system.
– Lack of credible
Read more on EUR/USD trading.