HSBC Issues Dire Warning on the Fate of the GBP
A Negative Outlook Lies in Store for the GBP this Year
By the close of trade in the UK on Tuesday, 25 April 2017, the GBP/USD pair was trading at 1.2835, +0.35% or $0.0046. For the year to date, the GBP has appreciated from 1.2349 to its current level, for approximately 3.9% in gains. Much of this appreciation has taken place since April 17, 2017, and it is thanks to Prime Minister Theresa May’s calls for a snap election that we are seeing short-term bullishness.
Going Short on the GBP to Balance the Current Account
The GBP/USD is likely to remain weak throughout the remainder of 2017. This is due to the economic imbalances that are currently dominating the market, in addition to the geopolitical uncertainty we are seeing across Europe and the United Kingdom. HSBC has been critical of the USD in recent months, and this has helped to boost guidance on the GBP/USD pair to 1.20, up from 1.10. The sterling is likely to be pressured by the deficit on the UK current account, which measures the aggregate flow of funds out of the United Kingdom. Currently, the deficit indicates that a net outflow of funds is taking place and that the GBP is being sold in favour of other currencies. As a result, the GBP is being weakened by short positions.
FTSE 100 Index Soars as GBP Falters
After the June 23 Brexit referendum, the GBP fell precipitously. It was trading around 1.48 to the greenback, and plunged to a 31-year low in the aftermath. This helped the FTSE 100 Index rally to all-time highs, breaking through the 7,000 level and charging ahead. Currently, the FTSE 100 Index is trading around 7,275.64, up 0.15%. For the year to date, the return on the FTSE 100 index is 1.86%, but the 1-year return is a staggering 20.90%. The 52-week range on the all share index is 5,788.74 on the low end and 7,447 on the high-end.
The correlation between the FTSE 100 index and the strength of the GBP is clear. When the GBP is depreciating relative to other currencies, this bodes well for companies listed on the FTSE 100 index. The reason for this is that most earnings on the all share index are derived overseas. Foreign earned income on FTSE 100 index companies is worth more when it is repatriated back to the United Kingdom. A weak GBP helps the UK with its exports, and this invariably narrows the current account deficit. We saw this happening when the current account deficit was 5% of Gross Domestic Product (GDP), and it was reduced to 2.5% of Gross Domestic Product by Q4 2016.
British Election May be a Step in the Wrong Direction
HSBC has been particularly bearish on the performance of the USD in 2017. Trump Trade is expected to weaken, as the president has failed to inspire confidence in the US economy. Many analysts are now shifting position on US economic performance, saying that Trump’s policies will not keep the dollar rally active. But the far greater concern for the UK currency is the Brexit. Now that Theresa May has invoked Article 50 of the Lisbon Treaty, and called for June elections, there is a degree of uncertainty about the GBP.
From the UK perspective, she may increase her majority in parliament and operate with greater autonomy, but that will not do anything from the European Union perspective. There is no guarantee that May will be able to avoid a hard Brexit even if she increases her majority. All 27 members of the European Union will have to agree to any transitional deal with the UK – such an outcome is highly unlikely.
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About Brett Chatz
Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes from his vast expertise in online trading for iForexTrader.co.uk.