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Brexit and politics are affecting the pound again. The external challenge, alongside a difficult growth path and limited fiscal flexibility, suggests that the GBP should fall from here regardless, in the view of economists at HSBC.

Key quotes

“The window to sign a free-trade agreement between the UK and EU is closing fast. And there is an increasingly fraught domestic political situation. The Internal Market Bill – which the government itself has admitted breaks international law (albeit in a ‘limited and specific’ way) via reneging on the previously signed Withdrawal Agreement (source: BBC, 8 September 2020) – has created headlines which have swung the GBP back and forth. However, the real question for the GBP is whether these events increase or decrease the possibility of a free-trade agreement with the EU. The mood music from the EU suggests things are getting more difficult, not less.”

“Anything that makes a free-trade agreement less likely should weigh on the GBP. If it becomes evident that ‘no deal’ is the most likely outcome, the fall in GBP would not be ‘limited and specific’. We believe GBP/USD should trade materially lower in this scenario. But even if a deal can be reached, it is worth remembering that the barriers to UK-EU trade and investment will still be greater in the future than they are now.”

“The external challenge, alongside the difficult growth path and limited fiscal flexibility, suggests that GBP should fall from here regardless. We expect GBP/USD to decline further this year.”