GBP/USD: Falling this year before a very modest rebound in 2021 – HSBC

GBP is particularly vulnerable in a world driven by fiscal dynamics. The UK's status as a foreign debtor and the resurfacing of Brexit create further challenges at an already difficult time. Economists at HSBC see GBP/USD moving lower this year before a very modest rebound in 2021. Rabobank is also picturing a weaker sterling.

Key quotes

“The starting point of high debt-to-GDP may make it harder for the UK to finance a slow, drawn-out economic recovery than other countries with better fiscal positions, such as Australia and New Zealand.”

“Large external liabilities create the risk of outflows from foreign investors selling UK assets. The UK's position as a net debtor also causes a persistent drag on the currency as foreign investors repatriate earnings on their underlying stock of investment.”

“Brexit risks have risen again as the UK government continues to rule out an extension to the transition period, and a comprehensive free-trade agreement might be difficult to agree before the end of 2020. If no agreement is reached, GBP may weaken to reflect greater trade and investment frictions.”

“As we enter a deep recession with only a lumbering recovery thereafter, structural forces are likely to weigh more heavily on GBP. We therefore see GBP/USD falling in 2020, before a very modest rebound in 2021.”