UK: Political shock opens structural cracks - HSBC

Research Team at HSBC, suggests that the UK was perhaps the clearest example of political drivers taking over while the GBP had been a cyclically driven currency, with interest rate differentials dominating cable’s movements.

Key Quotes

“But from the start of 2016, the UK’s referendum on EU membership started to dominate the market. This political event shone a bright light on the UK’s structural imbalances.”

“The vote to leave the EU has left GBP exposed to further political uncertainty – both domestically and in terms of the UK’s relationship with the EU. It also creates challenges in terms of funding the UK’s massive current account deficit as foreign investors become less inclined to buy UK assets given this increased political uncertainty. Our base case is that the Brexit negotiation process will not be easy, and that uncertainty will continue. We therefore continue to see significant downside risks for GBP and forecast GBP-USD at 1.20 for year-end 2016 and 1.10 for year-end 2017.”