GBP Faces Renewed Downside Risks Amid Softer UK Data and Geopolitics

HSBC's economists argue that the British Pound (GBP) faces renewed downside risks due to softer UK data and geopolitical pressures. According to the bank, the UK's disinflation and a softer labour market reduce the urgency for further Bank of England tightening, even though markets still price hikes out to 2027.

The bank highlights that despite recent strength in the Pound, supported by higher UK yields, the key risk remains geopolitics, particularly energy risks. With headline Consumer Price Index (CPI) down to 2.6% year-over-year, the case for near-term Bank of England hikes looks less urgent.

HSBC Economics sees a high bar for the BoE to turn decisively more hawkish, given the softer labour market. The bank notes that while GBP has held up over the last month, it remains vulnerable to energy risks and policy credibility wobbles.