HSBC Sees Gradual Dollar Strength Against Pound Ahead of UK Budget

HSBC strategists are highlighting the pressure on the GBP/USD pair, driven by strong U.S. economic data, a more hawkish Federal Reserve, and narrowing interest rate differentials between the UK and the U.S. The British Pound (GBP) is expected to face further challenges unless the upcoming UK Budget on 28 October delivers a positive surprise.

The recent speech by UK Prime Minister Andy Burnham at the Labour Party conference on 29 September did not move the markets significantly. While the speech outlined long-term economic visions, including regional devolution and energy market reforms, it lacked specific details on economic growth or fiscal strategy ahead of the Budget.

Investors are more focused on cyclical factors, such as resilient U.S. economic data, the Federal Reserve's hawkish stance, and the diminishing support from UK-US interest-rate differentials. GBP/USD has dropped this month to its lowest level since June, primarily due to the strength of the U.S. economy.

The economic outlook for the UK remains less favorable, with HSBC Economics predicting slower growth and a cautious approach from the Bank of England ahead of its 5 November meeting. Markets are pricing in around 21 basis points of tightening for November, but this is heavily influenced by energy markets and geopolitical factors in the Middle East.

For GBP/USD to find stronger domestic support, the upcoming Budget will need to offer a positive surprise. Burnham's proposals could eventually support the Pound if they boost productivity, encourage regional investment, and enhance the UK's growth potential. Until then, the pair is likely to remain influenced by cyclical factors, with the USD expected to strengthen gradually against the GBP in the near term.