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GBP: Sterling Consolidates Near Lows, HSBC See Major Headwinds

GBP
CEEMEABulletUKMarketsForeign Exchange Bullets
  • Following the powerful selloff in GBP this morning, which prompted cable to fall to the lowest level since April, the pound has spent the majority of the US session consolidating near session lows, below 1.2350. As noted, 1.2300 and 1.2266 will remain the near-term technical targets for the move. In similar vein, EURGBP remains well bid towards the 0.8350 highs.
  • HSBC believe that with high debt, a flatlining economy, rapidly fading fiscal space and a wide current deficit, GBP faces major headwinds. Higher yields increase the government’s interest expenditure and could mean chancellor Reeves is forced to either raise taxes, cut spending and/or borrow more to meet spending commitments. They highlight that in the current environment, higher yields add downside risks to the UK economy and to GBP going forward.
  • ING think the sell-off in gilts looks to be more a function of factors peculiar to the bond market than investors demanding a risk premium of UK assets per se. Therefore, they don’t view this as the start of a chapter of independent sterling weakness and retain their forecasts that EURGBP will not stray too far from the 0.82/83 region this year. 0.8450/8500 could be the extent of the current correction should market positioning have further to unwind. ING acknowledge 1.2250 is very possible in cable, but 1.20 looks a bit of a stretch.
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  • Following the powerful selloff in GBP this morning, which prompted cable to fall to the lowest level since April, the pound has spent the majority of the US session consolidating near session lows, below 1.2350. As noted, 1.2300 and 1.2266 will remain the near-term technical targets for the move. In similar vein, EURGBP remains well bid towards the 0.8350 highs.
  • HSBC believe that with high debt, a flatlining economy, rapidly fading fiscal space and a wide current deficit, GBP faces major headwinds. Higher yields increase the government’s interest expenditure and could mean chancellor Reeves is forced to either raise taxes, cut spending and/or borrow more to meet spending commitments. They highlight that in the current environment, higher yields add downside risks to the UK economy and to GBP going forward.
  • ING think the sell-off in gilts looks to be more a function of factors peculiar to the bond market than investors demanding a risk premium of UK assets per se. Therefore, they don’t view this as the start of a chapter of independent sterling weakness and retain their forecasts that EURGBP will not stray too far from the 0.82/83 region this year. 0.8450/8500 could be the extent of the current correction should market positioning have further to unwind. ING acknowledge 1.2250 is very possible in cable, but 1.20 looks a bit of a stretch.