FX Viewpoint | GBP: Less wind in the sails | Article – HSBC VisionGo
- The GBP has performed well over the past month…
- …due to upside UK economic data surprises and possible inflows into the UK’s equity market
- We expect the GBP to strengthen against a weaker USD over the coming weeks, but not against the rest of G10 FX
The GBP has performed well over the past month; as good news keeps on coming.
Upside UK economic data surprises are fostering upward revisions to GDP, supporting the GBP
UK activity indicators continue to surprise on the upside as reflected in a renewed upturn in HSBC’s activity surprise index during April and May (Chart 1). This was in contrast to the flat profile for the series during Q121. Our economists recently revised up the UK GDP growth forecast to 6.8% for 2021, reflecting this hot streak of economic data. They are not alone. The consensus expectation for UK GDP this year has accelerated higher from 4.5% in March to 6.0% currently (Bloomberg, 19 May 2021).
Inflows into the UK’s equity market may also be proving helpful
Enthusiasm for UK equities could have attracted foreign portfolio inflows, which may also be playing a part in the GBP’s upward momentum, but we will have to wait for Balance of Payments data (to be released on 30 June) to provide insight on the flows.
With much good news now priced in, we expect the GBP to underperform other G10 currencies over the coming months
The GBP should be well placed to capitalise on our expectation of USD weakness over the coming weeks, but we do not think it will outperform the rest of the G10 currencies this year. In part, this is because of its earlier outperformance, which the GBP is trailing only the CAD so far this year in terms of G10 FX performance (Chart 2). In addition, while rate expectations have moved in a hawkish direction since the start of the year, most of this adjustment happened in January and February. Interest rate futures have generally tracked sideways in a range since then. The Bank of England’s rhetoric does not suggest we are on the cusp of a policy guidance shift that would prompt another selloff in rate futures and attendant GBP strength. Finally, our flow data show that speculative investors have been active buyers of the GBP since mid-March. While this could continue, such flows could prove fickle. Overall, a lot of good news is already in the price, in our view.
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