Weaker GBP needed for structural adjustment – HSBC

Research Team at HSBC, suggests that a weaker GBP may cause an adjustment in the UK’s external imbalances and struggle to believe that the fall in the currency seen so far will create a significant narrowing of the current account deficit.

Key Quotes

“This means foreign investors would need to keep financing the deficit. But the UK’s decision to leave the EU may put some of these flows at risk. There are a number of potential policy implications of this. But the clearest outcome in our view is that GBP needs to weaken further to make UK assets attractive enough to foreign investors, given the massive uncertainty.

The sharp fall in GBP so far has simply been the market reacting to the UK’s vote to leave the EU. From here there should be an ongoing grind lower in GBP as the recent weakness is not enough to rebalance the UK economy. We see GBP-USD at 1.20 by the end of the year, and EUR-GBP at 0.92. However, this downward pressure on GBP will remain for a protracted period of time. After all, the forthcoming political and economic challenges will keep the UK's current account under immense pressure into next year too. As such we now forecast GBP-USD at 1.10 by the end of 2017.”