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The emergence of a new, potentially more virulent form of COVID-19 in the UK and little progress on Brexit saw the GBP sharply weaker on December 21. There could be even greater downside if UK-EU talks do not manage to finalise a free-trade agreement. All in all, economists at HSBC continue to see the GBP underperforming its G10 peers.

Key quotes

“The emergence of a new, potentially more virulent form of COVID-19 in the UK has had a number of important consequences. Domestically, greater restrictions have already been imposed on much of the country and could potentially last longer than previously envisaged. The new virus strain has led many countries to block arrivals from the UK and flights to an increasing number of destinations have been cancelled.”

“While political fudges such as a provisional deal with ex-post ratification are possible, market participants will no doubt be acutely aware of the risk of heading to a ‘no-deal’ scenario by accident. In such a ‘no-deal’ world, we would expect GBP/USD to be significantly lower, but the broad scale of USD’s recent weakness may limit some of that. However, we would expect markets to move quickly to price in a restart of trade talks, which might see some GBP buying emerge on a knee-jerk lower.”

“We continue to expect the GBP to underperform in a G10 context, and think the GBP will barely make gains even against a broadly soft USD in the months ahead, against the backdrop of an improving global economy.”