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HSBC has adjusted its Sterling forecasts higher against the U.S. Dollar but lowered them against the Euro in response to recent "seismic shifts".
"We cannot ignore when the facts change, especially when they relate to politics," says Paul Mackel, Global Head of FX Research at HSBC.
The single most important development impacting the FX outlook concerns Germany, where the government has committed to turning on the spending taps to boost infrastructure and defence.
The investment bank raises its forecasts for the Euro as a result while also seeing less scope for USD strength.
"The backdrop of significant U.S. policy uncertainty has shifted from being a source of expected USD strength to one of fatigue and, more recently, a negative driver," says Mackel.
The U.S. Dollar strengthened into 2025 amidst economic outperformance that markets thought would extend under Donald Trump's presidency.
However, tariffs and efforts to cut spending have lowered growth expectations and triggered a stock market selloff.
HSBC lowers its USD forecasts as a result.
Regarding Pound Sterling, the bank is cautious, warning of structural economic challenges and persistent fiscal constraints that could weigh on the currency later in the year.
HSBC now forecasts GBP/USD at 1.23 by year-end 2025, up from its previous projection of 1.20, and expects GBP/EUR to decline gradually as the UK’s economic difficulties come into sharper focus.
Sterling has benefited from renewed investor interest in European assets and higher defense spending across the continent, which HSBC expects will provide some economic tailwinds for the UK.
"Higher defense spending and investment in European neighbors should benefit the UK,” Mackel says. However, it noted that the UK’s defense sector remains relatively small. "Such exports accounted for 1.7% of total UK goods and services exports in 2023 and 0.5% of GDP.”
Despite these temporary gains, HSBC remains skeptical about the pound’s ability to sustain its rally. "The UK faces other challenges. Economic growth continues to stagnate, and the government faces fiscal constraints," Mackel says.
HSBC’s updated projections reflect a higher near-term outlook for GBP/USD, but a more cautious stance for GBP against the euro:
Despite Sterling’s short-term gains, HSBC’s outlook suggests that the currency will struggle to sustain its current strength. “With US tariff policy unsettling the global economy, we think GBP-USD will fall through the year to 1.23 by Q4," says Mackel.
In the broader context of global FX markets, HSBC’s revisions highlight Pound Sterling’s fragile position amid economic uncertainty, with the pound benefiting from temporary shifts in sentiment but still facing structural challenges ahead.