HSBC analyzes the factors behind GBP’s strong performance in 2024 and discusses the potential challenges ahead. While the currency has been resilient due to its high carry, HSBC warns that the outlook may not remain as favorable, especially with expected further rate cuts by the Bank of England (BoE).

Key Points:

• GBP’s Strength in 2024:
  • GBP has been the most resilient G10 currency this year, largely due to its high carry.
  • CFTC data shows long GBP positions are near all-time highs, highlighting the currency’s attractiveness to investors.

• BoE’s August Rate Cut:

  • HSBC notes that the BoE’s rate cut in August should not be overlooked, even though the central bank has maintained a cautious stance on easing.
  • The UK’s lackluster growth outlook suggests further easing is likely, with HSBC expecting another 25bp rate cut in November.

• Structural Challenges:

  • The UK’s current account deficit is primarily financed by „other investment“ flows, linked to the carry inflows supporting GBP this year.
  • As the carry buffer narrows, HSBC anticipates that GBP may start to weaken against the USD in the coming months.

Conclusion:

While GBP has shown remarkable resilience in 2024 due to high carry, HSBC foresees potential challenges ahead. The BoE’s continued rate cuts, coupled with the narrowing carry advantage, may lead to a decline in GBP’s strength, with targets of GBP/USD at 1.26 by the end of Q3 and 1.25 by the end of Q4.

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This article was written by Adam Button at www.forexlive.com.