The challenging growth outlook for the UK economy to weigh on the GBP – HSBC

The Bank of England (BoE) exceeded expectations by announcing GBP150 B of additional quantitative easing (QE) in November. For now, the GBP remains content with the BoE policy and hopes for the best from Brexit talks, taking its cue from global risk appetite. Looking into next year, the challenges that the UK economy faces should see downside risks for the GBP, economists at HSBC apprise.

Key quotes

“On 5 November, the BoE announced that it had increased its QE purchase programme by GBP150 B. Meanwhile, the central bank kept its benchmark interest rate unchanged at 0.1%. Unsurprisingly, the additional easing reflected the weaker near-term economic outlook as a result of rising COVID-19 infections. The GBP weakened initially, but that did not last long. The BoE also did not take the route of negative interest rates, for now at least, and retained a rather optimistic view on 2021 growth of 7%. However, the BoE still sees the risks skewed to the downside and the inflation projections also hint at room for more easing.”

“Looking into 2021, we believe the outlook for economic growth is likely to become a chief differentiator for FX. For the GBP, even if a Brexit trade deal is secured (which is also our central scenario), the UK economy still faces the additional headwind from moving to a new trade regime alongside the challenges of COVID-19 and a faltering cyclical recovery. The UK government’s fiscal firepower to respond also faces the constraint of a high and rising debt level. All this suggests that the outlook for the GBP remains thorny.”