– HSBC remains pessimistic on the GBP
– Traders guilty of “optimistic frenzy”
– GBP / USD drops back below 1.40
– GBP / EUR could dip below 1.10 before the end of the year
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The strong performance of the pound in 2021 surprised the FX analysis team at HSBC by surprise, but they are not sure that the good times will last for the currency.
Indeed, the team led by Paul Mackel, Global Head of FX Research, remains “the most hardened of GBP pessimists”.
In a monthly forex research briefing, the British lender and international banking giant said that the strong performance of the pound in recent times was due to a stronger economic recovery and “a rise in interest rates at the same time. ‘before the curve “. (More on that below).
But, “we remain skeptical of continuing to outperform with such high expectations compared to reality,” Mackel says.
Using the current Euros football tournament as an analogy to the perhaps misplaced investor confidence, Mackel adds:
“Even as the most hardened GBP pessimists, it is difficult for us to stop a wave of jubilation that seems to be sweeping the nation.”
The pound is one of the best performing currencies of 2021 – just behind the Canadian dollar – having gained 4.0% against the euro and 3.35% against the US dollar.
The outperformance has convinced much of the market to engage in betting that further gains are likely, which Mackel describes as an “optimistic frenzy”.
International Money Market (IMM) positioning data shows that compared to historical levels, the pound has only experienced a longer long positioning on a few occasions over the past decade.
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HSBC research shows that the pound tends to weaken when IMM positioning is high and has gone up.
“We believe caution is warranted,” Mackel says. “While ‘the trend is your friend’ is often a great adage in financial markets, these positioning levels require special attention.”
HSBC has found that a key driver of the pound – UK interest rates – has now potentially moved away from the currency’s current values, leaving it exposed to the risk of a downward correction.
They find that the movement of the GBP / USD pair has been much more aggressive than the movement of the base interest rates of the GBP (learn more about these interest rates here).
“Given where the pound is trading relative to the rate of movement in the market, this suggests that the currency should already show signs of giddiness,” Mackel said.
The state of the UK economy underlies HSBC’s pessimism towards the pound sterling; they recognize that even if he does recover, he still won’t manage to outperform his peers in the next couple of years.
It is this peer lag that ultimately leaves the pound in the slow lane.
Headwinds weighing on the economy include Brexit readjustments, while the UK’s persistent current account deficit (UK imports more than it exports) is seen as a long-term headwind for the currency.
Another reason regularly cited by currency analysts to explain the good performance of the pound in 2021 is the rapid vaccination rate of the country which was supposed to allow the country to unblock itself in a sustainable way before the others.
But the country’s vaccination rate has now fallen behind those of Canada, the United States, Germany, France and Italy with few signs that it will return to its once admirable position. given tight vaccine stocks.
And, the benefit of vaccination might not matter given the UK’s delay in fully lifting restrictions due to the increase in cases of the Delta variant of the Covid virus.
HSBC research shows that the vaccine’s positive story has not yet necessarily reflected in the UK’s economic outperformance, and is unlikely ever to be.
“This should give sterling buyers a break, especially as the UK vaccination ‘edge’ starts to slow down and others are catching up to what is already being factored in,” Mackel said.
HSBC has raised its forecast for the British pound, but even still those estimates remain below current levels on the spot.
The pound-dollar exchange rate is forecast at 1.40 by the end of June 2021, up from 1.34 previously. It is forecast at 1.34 at the end of the year, unchanged from previous forecasts.
In mid-2022, the exchange rate is expected to be 1.34.
The Euro-Pound crossover is forecast at 0.85 by the end of June 2021, 0.9179 by the end of the year and 0.88 by mid-2022.
This gives a pound-to-euro exchange rate forecast of 1.1764, 1.0894, 1.1363 and 1.1363 respectively.
GBP / EUR Forecast 2021
Period: From the second quarter of 2021
GBP / USD forecast 2021
Period: Q2 2021