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The Brtish Pound's rapid climb against the U.S. Dollar risks stalling, says a currency strategy note from HSBC.
The Pound to Dollar exchange rate (GBP/USD) rose three-quarters of a per cent on Monday and is holding the gains on Tuesday, quoting at 1.3210, placing it 50 pips shy of the 2025 high.
Gains in GBP/USD are driven by USD weakness as markets raise expectations for a 50 basis point rate cut at the Federal Reserve on Wednesday. However, a decision to leave UK interest rates unchanged at the Bank of England on Thursday is also said to be helping.
"For now, the ramped up Fed cut expectations is having a deleterious effect on the USD broadly, and GBP/USD specifically as the BoE is expected to hold rates steady when it delivers its rate decision the day after the FOMC," says Paul Spirgel, a Reuters market analyst.
Can the Pound rally to the 2024 peak against the U.S. Dollar at 1.3270, potentially taking in even higher levels? A new research note says the GBP/USD risks stalling, meaning those looking for the best dollar rate should consider locking in part of their exposure around today's current levels.
Markets now see a 75% chance of a 50bp interest rate cut at the Fed on Wednesday, whereas this time, one week ago, the odds were at only ~30%. The ramp-up in odds for a 50bp cut followed a pair of media reports last Thursday that said a 50bp was in play, with analysts noting the close links between the author of one article in the WSJ and the Fed.
Because the report is unsubstantiated, there is a real risk of disappointment. Should a 25bp rate cut be delivered, then the Dollar can recover and GBP/USD will drop sharply. "Sterling is vulnerable should the Fed only cut 25bp," says Clyde Wardle, Senior EM FX Strategist at HSBC.
Wardle says a 25bp cut scenario would see the USD shift onto better ground, "especially given the extensive pricing for rate cuts already factored into markets and signs of excessive short USD positioning."
Money markets show there are nearly 260bp worth of cuts priced by the market by the end of 2025, while the latest IMM report shows the total net short USD position stood at its largest since August 2023.
This means the market is already betting heavily against the Dollar and Wardle says, "the Fed would have to meaningfully 'out-dove' easing expectations in terms of its dots and messaging than what the market is already pricing."
"That said, kicking off with a deeper, 50bp cut this week may – at least in the short term – could see the USD weaken," he adds.
The Bank of England decides a day later, and markets see minimal chances of a cut with a clear majority of the Monetary Policy Committee voting to keep rates unchanged.
But, currency market analysts say the Pound can come under pressure if the vote is tighter than expected.
Ahead of the Bank's decision is the release of UK CPI data on Wednesday, which Wardle thinks could alter the Bank's thinking.
"The risk is that these data soften more than expected, as other forward-looking indicators show UK price pressures abating. It is less clear what can boost GBP’s strong run further, especially when some positioning metrics suggest it is a very crowded long (i.e. record net long GBPs on IMM)," says Wardle.
With positioning in the Pound and Dollar stretched in opposite directions and the market close to fully pricing in a 50bp Fed cut and no action at the Bank of England, the impetus needed to clear the 1.2275 hurdle in GBP/USD is immense.