GBP/USD: Monetary and fiscal pressure to weigh on the pound – HSBC

The GBP is facing some downward pressure amidst headlines from two Bank of England (BoE) policy makers and potential tax hikes by the UK government to pay for health and social care. Economists at HSBC have long argued that GBP/USD should be lower and these forces help to cement that thinking.

See: GBP/USD to break above 1.39 as UK data set to fuel sterling – ING

A tax hike, risking a weaker UK growth into 2022, to weigh on GBP

“One of our concerns for the GBP has been how the UK economy would hold up once the UK government support rolls off in the second half of the year. But a tax hike would be an even more direct hit to the economy, especially as it would fall more prominently on younger and lower income workers who tend to have a higher propensity to consume. This risks a weaker UK growth outlook into 2022.”

“While quantitative easing (QE) looks likely to run its course this year, the big question is when and how quickly the BoE’s monetary policy committee (MPC) will hike. Comments from MPC members Michael Saunders and Catherine Mann suggest that risks are skewed to being later and slower than the market currently has priced.”

“The GBP was the second outperformer in H1 among G10 currencies (only lagging behind the CAD), and, if anything, appeared to price in a more optimistic scenario compared to rate pricing during this period. Risks to the downside are now building from this excessive exuberance.”