GBP/USD: Much good news now priced in, sterling to underperform other G10 currencies – HSBC

The pound has performed well over the past month due to upside UK economic data surprises and possible inflows into the UK’s equity market. Economists at HSBC expect the GBP to strengthen against a weaker USD over the coming weeks, but not against the rest of G10 FX.

Inflows into the UK’s equity market may be proving helpful

“Our economists recently revised up the UK GDP growth forecast to 6.8% for 2021, reflecting this hot streak of economic data. They are not alone. The consensus expectation for UK GDP this year has accelerated higher from 4.5% in March to 6.0% currently.”

“Enthusiasm for UK equities could have attracted foreign portfolio inflows, which may also be playing a part in the GBP’s upward momentum, but we will have to wait for Balance of Payments data (to be released on 30 June) to provide insight on the flows.”

“The GBP should be well placed to capitalise on our expectation of USD weakness over the coming weeks, but we do not think it will outperform the rest of the G10 currencies this year. In part, this is because of its earlier outperformance, which the GBP is trailing only the CAD so far this year in terms of G10 FX performance. In addition, while rate expectations have moved in a hawkish direction since the start of the year, most of this adjustment happened in January and February.”

“The Bank of England’s rhetoric does not suggest we are on the cusp of a policy guidance shift that would prompt another selloff in rate futures and attendant GBP strength.”