ExchangeRates.org.uk - The Pound to Dollar (GBP/USD) exchange rate has hit 30-month highs at 1.3340 before consolidating just above 1.33.
The Federal Reserve interest rate cut boosted the Pound, but HSBC (LON:HSBA) is sceptical that GBP/USD gains are sustainable, especially given UK fundamental vulnerability. It also expects dollar resilience will drive GBP/USD to 1.25 at the end of 2025.
HSBC challenges two arguments that have been used by investment banks to forecast medium-term dollar weakness.
Firstly, it doubts that Federal Reserve rate cuts will necessarily damage the dollar. A gradual cut in rates would increase optimism over a soft US landing which would boost confidence. At the other end of the spectrum, US recession fears would drive defensive demand for the US currency. The bank also rejects the case for a substantial repatriation of assets from US markets.
Given the state of the Chinese and Euro-Zone economies, HSBC considers that substantial flows from the US into these economies are unlikely. Looking specifically at the UK, HSBC notes that the country is continuing to run a substantial current account deficit which is being funded by volatile short-term investment inflows rather than more robust capital inflows. In this context, it considers the Pound will be vulnerable if global risk appetite deteriorates.
This content was originally published on ExchangeRates.org.uk
