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UK high-street lender and international financial services giant HSBC say they expect Pound Sterling will fail to replicate the gains seen in the first quarter of 2021.
In a new monthly currency research briefing HSBC acknowledge that there is much optimism about the UK following a successful vaccination programme and the likelihood of a much wider "opening up" from 19 July.
But, "we are sceptical of how much this can further benefit GBP," says Paul Mackel, Global Head of FX Research at HSBC.
The British Pound outshone its peers in the first three months of 2021 as investors bought into the resolution of the Brexit saga, but it was the UK's quick rollout of Covid-19 vaccines that caught investor attention.
A first mover advantage on the vaccine rollout offered the prospect of UK economic outperformance in 2021 as it would ultimately be able to ease restrictions on a sustained basis.
Indeed, this easing of restrictions has now largely occurred and all restrictions are now due to be lifted on July 19.
But foreign exchange strategists are quick to point out however that this good news is now largely incorporated into the Pound's valuations.
Indeed, Sterling's 2021 highs are in the rear-view mirror: the Pound-to-Euro exchange rate (GBP/EUR) peaked at 1.18n in early April while the Pound-to-Dollar exchange rate (GBP/USD) went as high as 1.42.
Above: Pound-to-Euro exchange rate shown at daily intervals with Fibonacci retracements of April move higher.
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"Although GBP is down from its highs for the year, there is a lot of positivity priced in to the currency, especially when one considers the relative movements in rates and equity flows," says Mackel.
HSBC's research suggests neither the interest rate or equity story are aligned for further upside in Sterling.
"In other words, GBP is reflecting all of the optimism and any emergence of downside risks would hit the currency," says Mackel.
HSBC says risks to the outlook include the ending of government support schemes, which include the ending of the furlough scheme in September and the ending of the stamp duty reduction (this has already happened).
"The recent pace of growth has been very good, but it comes from a starting point which saw the UK economy lagging its potential more than its peers, due to the bigger fall in output seen earlier in the crisis," says Mackel.
Above: Pound-Dollar rate shown at daily intervals: Benefits from a thicket of Fibonacci support levels located between 1.3675 and 1.3713, in addition to GBP’s 200-day moving-average at 1.3672.
Incoming data meanwhile suggests economic growth rates might have peaked.
The Pound fell on July 09 when GDP for May was released alongside industrial and manufacturing production data which all disappointed against investor expectations.
The UK economy grew 24.6% in the year to May, an impressive headline figure flattered by the economic crash a year earlier but one that nonetheless is softer than the 25.9% the market had been expecting.
For foreign exchange markets this is potentially significant given currencies are trading in a regime that places heightened emphasis on economic growth differentials and central bank monetary policy.
In short, for the Pound to outperform UK economic data must deliver upside surprises.
Should further data releases disappoint the market might be obliged to push back the expected date of the first Bank of England interest rate rise, a development that would be on balance unsupportive of Pound valuations.
HSBC forecast the GBP/USD exchange rate to end 2021 at 1.37, be at 1.38 by the end of March 2022, 1.38 by the end of June 2022 and 1.37 by the end of September 2022.
Their Euro-Dollar forecast profile for the above timeframes is 1.22, 1.17, 1.19 and 1.23.
This gives a cross Pound-to-Euro exchange rate forecast profile of: 1.12, 1.18, 1.16 and 1.11.