FX Spotlight | GBP: Monetary and fiscal pressure | Article – HSBC VisionGo
- The UK government’s new levy takes its overall tax burden to historical highs…
- …and the recent comments from the two BOE policy makers appear to be less hawkish
- All these forces help to cement our expectation of a lower GBP-USD
The GBP is facing some downward pressure amidst headlines from two Bank of England (BOE) policy makers and potential tax hikes by the UK government to pay for health and social care. We have long argued that GBP-USD should be lower and these forces help to cement that thinking.
Our economists think that the overall UK fiscal stance will be negative
On taxes, the UK government has announced a new Health and Social Care levy – comprised of an increase of about 1.25% in National Insurance (i.e., a tax paid by workers and employers) to raise GBP11.4bn (apart from an additional 1.25% increase in dividend tax to raise GBP0.6bn). In our economists’ view, the new planned tax rises for 2022, alongside the corporation tax hike in 2023, will take the UK’s tax burden to historical highs, and so while the latest measures are technically fiscally neutral, with revenues matched by new spending on health and social care, the overall fiscal stance will still be negative and the ‘real feel’ for households and businesses could be painful.
A tax hike, risking a weaker UK growth outlook into 2022, would weigh on the GBP, in our view
One of our concerns for the GBP has been how the UK economy would hold up once the UK government support rolls off in the second half of the year. But a tax hike would be an even more direct hit to the economy, especially as it would fall more prominently on younger and lower income workers who tend to have a higher propensity to consume. This risks a weaker UK growth outlook into 2022.
The recent comments from the BOE policy makers suggest that the rate hike may come later and slower than what the market currently has priced
This then brings us onto the BOE and the rate hike profile. While quantitative easing (QE) looks likely to run its course this year, the big question is when and how quickly the BOE’s monetary policy committee (MPC) will hike. Comments from MPC members Michael Saunders and Catherine Mann suggest that risks are skewed to being later and slower than the market currently has priced (around 25 basis points higher than the current level by the middle of 2022, Bloomberg, 7 September 2021). Ms. Mann, a new appointee to the MPC, showed little concern about a return to a 1970s inflation spiral in comments made on Monday (Bloomberg, 6 September 2021). Meanwhile, Mr. Saunders, considered a hawk for voting to end QE sooner, suggested that hikes may happen “in the next year or so” but that any rises would be limited due to the fall in the neutral rate in recent years.
All this suggests a lower GBP-USD, in our view
The GBP was the second outperformer in H1 among G10 currencies (only lagging behind the CAD), and, if anything, appeared to price in a more optimistic scenario compared to rate pricing during this period. Risks to the downside are now building from this excessive exuberance, in our view.
This document is for information purposes only and should not be regarded as an offer to sell or as a solicitation of an offer to buy the securities or other investment products mentioned in it and/or to participate in any trading strategy. Information in this document is general and should not be construed as investment advice, given it has been prepared without taking account of the objectives, financial situation or needs of any particular investor. Accordingly, investors should, before acting on it, consider the appropriateness of the information, having regard to their objectives, financial situation and needs and, if necessary, seek professional investment and tax advice.
Certain investment products mentioned in this document may not be eligible for sale in some states or countries, and they may not be suitable for all types of investors. Investors should consult with their HSBC representative regarding the suitability of the investment products mentioned in this document and take into account their specific investment objectives, financial situation or particular needs before making a commitment to purchase investment products.
The value of and the income produced by the investment products mentioned in this document may fluctuate, so that an investor may get back less than originally invested. Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested. Value and income from investment products may be adversely affected by exchange rates, interest rates, or other factors. Past performance of a particular investment product is not indicative of future results.
HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments (including derivatives) of companies covered here on a principal or agency basis.
Whether, or in what time frame, an update of this information will be published is not determined in advance.
This report is dated as at 08 September 2021.
All market data included in this report are dated as at close 07 September 2021, unless a different date and/or a specific time of day is indicated in the report.
HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking, Principal Trading, and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.
You are not permitted to use, for reference, any data in this document for the purpose of (i) determining the interest payable, or other sums due, under loan agreements or under other financial contracts or instruments, (ii) determining the price at which a financial instrument may be bought or sold or traded or redeemed, or the value of a financial instrument, and/or (iii) measuring the performance of a financial instrument or of an investment fund.