GBP: Structural moderation - HSBC

The research team at HSBC points out that GBP has already seen a shift towards structural and political drivers.

Key Quotes

“Before the UK referendum on EU membership, the market paid little attention to the UK’s sizable structural imbalances – much like the US currently. But the pound has fallen significantly since the UK’s vote to leave the EU in June 2016, due to the negative drag of both political uncertainty and the UK’s large structural external imbalance – namely a current account deficit worth around 5% of GDP.”

“But the latest data has seen this structural driver become more balanced. The Q4 2016 deficit was only 2.5% of GDP – a lot narrower than we had expected and a significant improvement from prior quarters. The jury is still out on how sustained this will be. After all, the trade balance data so far in Q1 does not show a significant narrowing in the goods deficit. But the overall move in the current account certainly appears to be in the right direction.”

“This improvement is a key reason behind the moderation in our GBP forecast. We still expect some downside for the pound in 2017, but not as much as before. After all, the deficit has not disappeared completely and there is plenty of political uncertainty, particularly with a snap general election to be held on 8 June and ahead of Brexit negotiations with the EU. GBP will still face periods of downward pressure. But those pressures on the currency will be less intense given the structural requirement for foreign currency inflows has moderated. Alongside our profile for less USD strength, this sees our GBP-USD forecast pushed up to 1.20 (from 1.10 before). Our EUR-GBP forecast remains at parity for the end of the year.”