Many believe that Sterling could be in for a rough year considering the current circumstances. HSBC for example have a very pessimistic outlook predicting significant falls against the euro.
HSBC – “Outlook for GBP is not Promising”
HSBC have told clients of their commercial and investment banking unit that 2021 will likely see the pound continue to struggle.
In a regular monthly foreign exchange forecast briefing note, HSBC analysts say “the outlook for GBP is not promising, in our view, given the broader underlying flow dynamics.”
“We find little reason to be cheerful about GBP in 2021 and believe it will be a G10 underperformer alongside the USD” – Paul Mackel, Head of Foreign Exchange Research at HSBC.
HSBC argument is surrounding that the bullish hopes the market might have had for Sterling following the signing of an EU-UK trade deal appears to have rested on a potential reversal of long-term underweight positioning (UK stock valuations pushing higher).
Valuations on UK-focussed stocks are close to record lows and positioning depressed, with UK stocks said by Bank of America to have underperformed their EU counterparts by more than 20% since the EU referendum.
The GBP/USD exchange rate has meanwhile declined by 8.0% in this same period.
“After a challenging few years, there has been a growing sense that underweight positioning in UK assets will be unwound this year, ushering in a new dawn for GBP,” says Mackel.
Global investors, selling UK assets and pulling money out of UK – for example selling GBP and buying EUR and buying German assets.
They forecast the Pound-to-Dollar exchange rate at 1.34 through this year, with Euro-to-Pound exchange rate rising to 0.94 (1.0638).
Reasons for Optimism
We have seen such bold economic predictions in the past and sometimes they can land far from the mark. There are reasons for optimism.
The lack of clarity surrounding Brexit has been an anchor around Sterling’s neck for over four years. It is often the case that uncertainty is worse than bad news when looking at what moves markets. Despite Boris’s deal receiving a poor reception amongst investors, we now have clarity on the deal and we have pulled anchor.
Many economists were predicting substantial gains for Sterling against the majority of major currencies, but due to the quality of the deal and the UK being put on national lock down due to the pandemic these gains failed to materialise.
The good news is the rate at which people are being vaccinated int the UK is impressive in comparison to the majority of the western world, with over 5 million vaccinated at this point.
This could of course mean the UK economy will recover in a quick fashion from the economic damage caused from Covid-19.
GBP/EUR hit the best levels since May of 2020 during last weeks trading. Breaching 1.13 at some points. Short term, it could be the case that 1.13 holds up as a resistance point as over the last week’s trading we have seen GBP/EUR quickly retract whenever we go above the 1.13 mark. If you have a pending currency requirement purchasing Euros from GBP, get in touch using the form below to discuss.