The recent GBP underperformance is largely due to a less hawkish BoE and sluggish domestic activity data but its underperformance is unlikely to continue in the light of a rebound in global risk sentiment and improving domestic dynamics, economists at HSBC report.

GBP to benefit from the UK’s improving external balance

“With inflation in the UK having likely peaked and potentially set to decelerate more than consensus expects, a less aggressive tightening tone from the BoE now may mean a less abrupt turn of stance later in the year, which may end up becoming a marginal positive for the GBP in the months ahead. A shift towards better-than-expected domestic data should also be positive for the GBP.”

“The UK’s external rebalancing continues at pace, due to the combination of a cheaper currency and higher interest rates. Indeed, the UK’s trade balance for 3Q22 showed the narrowest deficit since December 2021. This may bode well for the GBP.”

“GBP has a very strong tie to global risk appetite in recent years. A bottoming out in global growth dynamics (compared to excessively pessimistic expectations), as well as a peak in global interest rates on the back of softening inflation pressure could allow the GBP to strengthen against the USD in an environment where risk appetite looks less febrile.”