GBP/USD to end the year at a lower level

GBP/USD has enjoyed support at 1.30 so far in August amid the USD's consolidation but economists at HSBC think the cable's outperformance of late leaves it exposed to the downside.

Key quotes

“On the cyclical front, recent data may not have been as bad as expected and the BoE recently revised its GDP and inflation forecasts higher, albeit highlighting downside risks. However, labour market data as of July 2020 shows 730,000 jobs lost since March 2020. More job losses are likely, as the UK government's support schemes are set to end in the months ahead. The government's ability to continue to fund such schemes may be compromised by the scale of underlying debt, constraining further fiscal expansion. Even if there is further fiscal easing, a larger burden of bond purchases may be taken up by the BoE, with an extension of unconventional policies weighing on the GBP.”

“The recent pick-up in COVID-19 cases in the UK could be further cause for concern. The UK government has responded with localised lockdowns, but the threat of wider restrictions remains.”

“The elevated level of the GBP is also vulnerable to a possible renewed focus on Brexit risks. There has been little evidence of progress in the negotiations, creating asymmetric downside risks to the GBP, especially if the tone around the negotiations remains downbeat in September. Even if the UK secures a partial free trade deal with the EU, it would increase constraints on trade and investment for the UK. This would likely require a weaker currency in order to offset the loss of competitiveness created by these burdens.”

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