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HSBC Admit Mistake on Euro-Sterling Forecast; No Longer Sees Parity

“We were wrong,” said HSBC’s head of strategy David Bloom as he cancelled the bank’s forecast for the euro to reach parity with sterling this year.

For much of 2017, HSBC analysts have been among the gloomiest on sterling with their predictions for continued declines in the currency against both the euro and dollar. Bloom had previously cited “political, structural and cyclical pressures” as reasons to be bearish GBP. Against the dollar, Bloom’s team had previously forecast a year-end rate of $1.20.

On the back of recent sterling-positive developments, HSBC are changing their tune. With the British currency’s 6% rise against the euro and dollar since late August, HSBC will of course be criticized for reacting to developments rather than staying ahead of them.

The pound has so far had an excellent September, having benefitted from hawkish rhetoric coming from the Bank of England. At the bank’s most recent meeting on September 14th, Governor Mark Carney said that an increase in UK rates would be appropriate “in the coming months,” and one day after the meeting, one of the BoE’s most dovish committee members, Gertjan Vlieghe, cemented expectations for a hike when he said that the bank was “approaching the moment when [the] rate may need to rise.”

“Contrary to our expectations, GBP has been exclusively driven by cyclical forces in 2017,” said Bloom on Monday.

EUR/GBP 3 Month Chart

HSBC’s revised year-end forecasts now place GBP/EUR and GBP/USD at €1.12 and $1.35 respectively.

However, Bloom is merely pushing back his sterling bearishness rather than giving it up entirely. While markets have jumped on the interest rate narrative like a rash, Bloom sees little consideration for political risk in the current price of sterling and he believes this will be its downfall in 2018.

“GBP’s tight relationship with the interest rate outlook suggests very little is in the price for political risk, a complacency which opens up asymmetric downside risks.”

Per HSBC’s new forecasts, the pound will depreciate to fetch €1.05 and $1.26 by the end of 2018.

If investors aren’t positioning themselves for future political risks, ratings agencies certainly are. Moody’s downgraded the UK on Friday to Aa2 – its third highest rating – because it saw trouble ahead for the UK’s public finances and an “erosion of the UK’s medium-term economic strength [resulting from] its departure from the European Union.”

Please note that the opinions of our authors are their own and do not reflect the opinion of Best Exchange Rates and should not be taken as a reference to buy or sell any financial product.

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