- Europe’s largest bank by assets reverses direction on the pound and admits being wrong about sterling in 2017.
- The bank argues that rather than being driven by Brexit developments as expected, cyclical factors have been more important.
- Rising expectations of a Bank of England rate hike have helped push the pound higher.
- HSBC had forecast that sterling would fall as low as $US1.20. It now believes the pound will end the year at $US1.35.
LONDON — “We were wrong.”
That is HSBC’s blunt, unusually contrite assessment of its call earlier this year that the pound would fall as low as 1.20 against the dollar in 2017, driven down by Brexit uncertainties and the prospect of the UK failing to negotiate a good Brexit deal — or in fact, any Brexit deal.
“We expected 2017 to be a difficult year for GBP, one in which the currency would succumb to the uncertainties that the Brexit vote had unleashed and where politics would remain the dominant driver,” HSBC’s David Bloom and Daragh Maher wrote in a note circulated to clients on Monday.
“It was the year when a lack of progress in Brexit negotiations would cause a fretful GBP to ponder a ‘no deal’ cliff-edge conclusion to the Article 50 machinations. Heightened political uncertainty would in turn highlight the UK’s structural frailties. The current account deficit would remain stubbornly wide, encouraging additional GBP downside.”
In short, none of that has happened. The pound is now trading at its highest level since the referendum, climbing above $US1.35 last week, and gaining more than 10% on the greenback since the beginning of the year, as the chart below illustrates:
Rather than trading on Brexit developments — as it did in second half of 2016 after the vote — the pound has behaved like a normal, cyclical currency, moving after things like data events and Bank of England announcements that have the ability to influence the next interest rate move from the central bank.
“This year GBP has slavishly and exclusively followed only cyclical drivers not the political ones,” Bloom and Maher argue, citing the chart below:
Here’s the bank’s analysis (emphasis ours):
“Chart 1 shows GBP-USD plotted against expectations for 1Y rates a year ahead in the UK compared to those in the US. Prior to the Brexit vote in June 2016, the relationship was neat. During H2 16, the power of political drivers to disrupt this relationship is evident. Yet in 2017, GBP reverted to being a cyclical slave, once again tracking those rate expectations. It’s as though the market has a set and stable idea of the Brexit negotiations.”
A perfect example of the pound’s cyclical shift came on Friday last week when it gained more than 1% on the dollar after the Bank of England’s Gertjan Vlieghe — probably its most dovish policymaker — said a rate hike could come in “months.”
Speaking at the annual conference of the Society of Business Economists, Vlieghe said that if the current “data trends of reducing slack, rising pay pressure, strengthening household spending and robust global growth” continue as they are, the bank could raise rates in the short term.
Vlieghe’s words were probably his most hawkish since he joined the bank’s Monetary Policy Committee, and reinforced the bank’s words from the previous day, in which it strongly signalled that markets are underestimating the potential for an increase in interest rates in the coming months.
The bank’s Monetary Policy Committee said that “some withdrawal of monetary stimulus is likely to be appropriate over the coming months in order to return inflation sustainably to target.” In central bank-ese, that was as clear of a hint as it gets.
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