The Pound Sterling (GBP) is the second best performing G10 currency so far this year. But as the Bank of England (BoE) catches up on the dovish side with other central banks, the GBP could face more downward pressure, economists at HSBC say.

Cable likely to track sideways over the near term

GBP/USD is beholden to rates, and its previous relationship with risk appetite appears to be broken so far this year. As such, the GBP can no longer capitalise on the upside to risk appetite from the US economy’s resilience. However, by the same token, it should mean the GBP is less vulnerable, should there be a measured correction in global risk appetite. All this points to a range-bound GBP/USD over the near term.

We think that the main driver of the likely weakness for the GBP is the slow but clear pivot by the BoE towards a more dovish stance. The UK still faces a challenging inflation-growth mix, making it hard for the BoE to remain a more hawkish outlier in the G10 space. As the BoE catches up on the dovish side with other central banks, the GBP could face more downward pressure in the months ahead.