GBP/USD may face further downside risks – HSBC

The GBP's recent decline has been dramatic. Wider deficits and bigger debt burdens need to be financed by foreign inflows – which may require further FX adjustment, according to economists at HSBC.

UK’s structural concerns dominate

“The UK’s public finance position (in terms of relative debt dynamics) is going to worsen materially in the year ahead. The GBP does not enjoy any special privilege in terms of financing this burden.”

“The UK’s core balance has seen a large decline from a 2% of GDP surplus to an 8% of GDP deficit in the last two years (Bloomberg, 30 June 2022). This requires greater short-term capital inflows just to keep the GBP on an even keel.”

“If foreign investors fear an unsustainable debt burden being ‘paid for’ through inflation or FX depreciation, they may not be as willing to finance it in the first place. This points to the potential for an ever weaker currency valuation.”