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Expectations of improving UK economic growth and less dovish Bank of England, alongside its early lead in vaccine rollout, have supported the GBP so far this year. Economists at HSBC think much of the good news is in the price and GBP/USD now looks high relative to rate differentials. When cyclical supports fade in allure, a renewed focus on the sizeable UK twin deficits may weigh on the pound.

GBP/USD looks high relative to rate differentials

“We believe that the GBP has capitalised on expectations of a robust cyclical upswing, as a successful COVID-19 vaccination rollout in the UK alongside the government’s fiscal largesse within the 2021 budget have supported the domestic economy.”

“On the monetary policy front, the BoE seems to be relaxed about the rise in UK government bond yields, echoing the Federal Reserve in suggesting it merely reflects justified economic optimism. Market expectations for the BoE have also become less dovish.”

“Much of the good news on the cyclical front is already priced into the GBP, and GBP/USD now looks high relative to its rate differentials, so the risk could be to the downside.”  

“As other nations are likely to close the gap on the UK’s early lead in vaccine rollout, the potency of the vaccination story is likely to wane in the coming months, curbing the GBP’s gains.”

“If the cyclical upswing fades, the sizeable UK twin deficits (i.e., deficits on both current account and fiscal balance) will challenge the GBP’s allure.”


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