HSBC: The pound is stuck in ‘Limbo Land’

Getty Images/Scott Barbour

The next move for the pound is completely uncertain, and the currency is currently stuck in “Limbo Land” following the UK’s vote to leave the European Union in June.

So says HSBC strategist David Bloom and his team in the bank’s weekly note about Britain’s currency. Essentially, no one at HSBC knows which way the pound will move next.

Following the Brexit vote, the pound dived off a cliff, hitting a low against the dollar not seen in three decades, and falling more than 11% in a single day to trade at $1.32.

At the start of this week it began to rally a little, before falling again on Thursday after the Bank of England’s governor Mark Carney said that the central bank may cut interest rates and carry out more quantitative easing. On Friday, it is down a little further to trade at $1.3274. The way it goes next, HSBC says, depends on whether or not what the markets expect to happen in the coming months, actually happens.

Here is the key extract from HSBC’s note (emphasis ours):

“The market has set out its vision of what it thinks will happen to the UK in the months and years to come, in the post-Brexit era. It does not see a rise in long-term inflation, and believes there is a strong possibility of at least one rate cut. It also sees a downturn in the UK economy, driven largely by consumer cyclicals, feeding through into UK housing market falls.”

“The degree to which this is validated will dictate GBP’s fortunes. Robust consumer data and a less-dovish BoE may cause the market to alter its view on UK rates, driving GBP higher. If the opposite is true, and consumer data are worse than expected, GBP would move lower.

“We have set out what we believe are the key dates to watch for the market’s vision to be validated or refuted, which hold the key to the GBP’s fortunes moving forward.”

Here are the key dates HSBC has identified. August will be the crucial month, as most data in July will relate to the performance of the British economy prior to the referendum, and as a whole hold little weight in the post-Brexit world:

HSBC

What happens to the pound, whether it moves higher or lower, will depend heavily on those dates.

HSBC’s caution on the pound’s trajectory is in opposition to the view of Pantheon Macroeconomics, which in a note to clients earlier this week said that it would be the “height of folly” to expect anything other than a drop in the pound over the coming months.

Pantheon argues that the current uncertainty surrounding the UK’s political landscape, as well as how, if, and when Article 50 — the clause in the 2009 Lisbon Treaty that will start the UK’s EU exit process — is triggered, means that people are going to start pulling capital out of the UK, further depressing sterling. The research firm’s estimates suggest that sterling could fall to around $1.20 — a level not seen since 1985.