GBP: Further downside risks - HSBC

Away from the economic arguments as to whether GBP should be a cyclically or structurally driven currency, analysts at HSBC also see further downside risks to the currency from a political angle.

Key Quotes

“Article 50 notification means there will be a much closer focus on the negotiation process, even if this does not begin immediately. In this negotiation process, we still have everything before us. Given the various “red lines” set up by both sides of the discussion, and the seemingly wide gap between the two on a number of key issues, we struggle to see this being a smooth process.”

“There have been a number of recent reminders from both the UK and the EU authorities that a “no deal” scenario is possible. With the two-year negotiation clock set to start ticking, the market may have to assign a greater probability to such a scenario, especially if the early stages of negotiations highlight the stark differences on these key areas, rather than the potential for a collaborative outcome.”

“The market may still want to remain in the epoch of belief, but as the negotiations begin, we may shift further into the epoch of incredulity. As such we still see further downside risks for GBP. GBP should be seen in a structural, rather than a cyclical, light. Inflation is not positive for the currency as it has been in the past. Higher prices are not being driven by higher growth, and inflation is therefore less likely to be accompanied by tighter monetary policy. The UK’s external imbalances have not yet shown significant signs of improving. We see GBP-USD falling to 1.10 by the end of 2017 and EUR-GBP moving to parity. For the currency, we still believe this is the worst of times.”