GBP Faces Renewed Downside Risks Amid Softer UK Data and Geopolitics

The British Pound (GBP) is facing renewed downside risks due to softer UK data and geopolitical uncertainties, according to HSBC. The bank's economists argue that the recent decline in headline Consumer Price Index (CPI) from 2.6% year-over-year has reduced the urgency for further Bank of England (BoE) tightening, even though markets still price hikes out to 2027.

The softer labour market is also seen as a challenge for the BoE to turn more hawkish, making it harder for GBP to maintain its recent resilience. Despite support from higher UK yields, HSBC notes that the key risk remains geopolitics, particularly with energy risks persisting and policy credibility wobbling.

The bank highlights that while markets still price in rate hikes through April 2027, the BoE's decision-making process is under scrutiny due to these uncertainties. The GBP's recent strength may be short-lived if energy risks persist and policy credibility continues to wobble.