GBP/USD: Further downside for cable next year as the UK economy appears to be challenging – HSBC

GBP/USD is likely to move sideways over the near term even if the Bank of England (BoE) delivers a rate hike on Thursday, December 16. Looking into 2022, economists at HSBC see further downside for the pound, as economic headwinds could weigh on the UK’s rates outlook.

Near-term neutral, but more downside risks ahead

“We expect GBP/USD to move sideways over the near term, despite the market’s confidence for a 15bp hike when the BoE meets on 16 December.”

“Looking into 2022, we believe interest rates are likely to have a bigger impact on G10 FX. With at least three more hikes in the price next year, the interest rate level of the GBP is still below that of other high-yielding G10 currencies, such as the NZD, and the USD.”

“The 2022 outlook for the UK economy appears to be challenging, amid an uneven economic recovery, Brexit frictions, and ongoing negotiations regarding the Northern Ireland protocol. These may somewhat explain the persistently low expectations of the UK’s ‘terminal’ interest rate, which makes the GBP vulnerable to a shift towards potentially faster tightening cycle in other G10 currencies, especially the USD.” 

“The GBP will probably also face a deteriorating current account deficit when the UK economy normalises.”