market had previously expected that the pound would rise significantly after the UK and the EU reached a Brexit agreement in December 2020, but its actual performance was relatively flat. On January 26, HSBC warned that the outlook for pound in 2021 is not optimistic, as research shows that the short positions of pound have not been significantly reduced, and it is difficult for the UK to attract overseas investment funds through issuing bonds to support pound, and the Bank of England still has the possibility of implementing negative interest rates. The bank now predicts that the pound will fall to 1.34 against the US dollar in 2021, which is about 350 points from its current level.
HSBC warned that the outlook for GBP 2021 is not optimistic
On January 26, HSBC (HSBC) told its clients in its business and investment banking division that GBP 2021 may continue to struggle. The bank's analysts' monthly Forex forecast briefing pointed out: "In our opinion, the outlook for the pound is not optimistic considering the broader potential capital flow dynamics."
Most foreign exchange analysts had previously expected that the pound would easily rise after the EU signed a trade agreement with the UK. However, after the agreement reached on December 24, the pound has been flat. So far in 2021, the pound has been moving well and badly, up 0.70% against the euro and 0.18% against the dollar. Meanwhile, the pound sterling exchange rates against the Norwegian krone, the Australian dollar and the New Zealand dollar all fell.
HSBC said that after the EU signed a trade deal with the UK, the bullish hope for the pound seemed to be based on the expectation that long-term short positions could reverse.
HSBC foreign exchange research director Paul Mackel said stock investors may hold low UK assets. Even with a larger inflow of investment funds in the UK, it is unclear whether it will support the pound.
UK stock market valuation is close to historical lows. Bank of America said that since the Brexit referendum, the performance of the UK stock market has been more than 20% worse than that of the EU. Meanwhile, the pound fell 8.0% against the US dollar during the same period.
Merkel said: "After several years of challenges, more and more people realize that investors will cut short positions in GBP in 2021, bringing new dawn to the GBP. We have no reason to be optimistic about the performance of the GBP in 2021, and believe that it will become the underperforming G10 currency like the US dollar."
It is difficult for the UK to attract overseas funds to boost the GBP. This is especially true if the British bank tends to negative interest rates
This forecast is expected to rebound sharply after the Brexit agreement, and the investment banks that hold skeptics are not just HSBC.
Analysts at Bank of America pointed out that compared with the EU and the United States, UK assets are relatively sluggish, and the pound is significantly lower than before the results of the Brexit referendum in June 2016.
Forex strategist Kamal Sharma of Bank of America said: "This raises the question: Is British assets safely clearing the way for a sharp rise in UK asset prices due to the risk of Brexit? However, we are still skeptical."
HSBC said that they studied position data for different assets and did not find that investors have significantly reduced their short positions in the pound. In terms of bonds, foreign investors have maintained good interest in British Phnom Penh bonds in recent years. The UK stock market does show signs of massive reductions in global investors. However, there is limited evidence that this will drive the pound to strengthen.
HSBC research shows that any money flowing into UK assets may not support the pound as some originally envisioned, especially if investors hedge the risks.
The pictures provided by HSBC show that the UK's international investment positions have a huge deficit
If the bonds issued by the UK cannot attract considerable investment funds, it will pose a considerable resistance to the pound.
HSBC research shows that foreign investors' interest in UK bonds far exceeds that in UK stocks, so this is more important for the valuation of the pound. Merkel, head of foreign exchange research at HSBC, said: “Given the decline in returns on investing in pounds in recent years, it may be more difficult for the UK to attract such a large-scale inflow of bond funds.Most notably, the return gap between the pound and other reserve currencies (USD, Euro and Japanese Yen) has reached nearly zero in recent years. ”
If the Bank of England considers reducing interest rates to 0% or lower, this problem will only get worse, which is something the market has been doubting for months.
Merkel said: “Given that positions have improved and the returns are no longer as rich as they used to be, it is hard to say that funds flowing into the UK will increase significantly, especially if the Bank of England tends to negative interest rates.” Given that the UK has recently implemented new pandemic restrictions, we cannot rule out the possibility of negative interest rates.
HSBC still believes that the pound will become one of the underperforming G10 currencies in 2021. The bank currently predicts that the pound will fall to 1.34 against the US dollar in 2021 and the euro will rise to 0.94 against the pound.
(Daily chart of GBP vs. USD)
