HSBC downgrades forecasts for GBP and EUR against USD

Paul Mackel, the Global Head of FX Research at HSBC, foresees a forthcoming depreciation in the values of both the Euro (EUR) and Pound Sterling (GBP) relative to the US Dollar (USD).

This revised currency outlook is shaped by the tightening yield differentials and a shift in external sentiment that is less favorable.

As of the time of this report, the Pound to Dollar exchange rate (GBP/USD) is observed trading at 1.24787, reflecting a 0.22% decrease from the daily open. Sterling's losses can be attributed to comments made by the Bank of England on Wednesday.

Meanwhile, the Euro to Dollar exchange rate (EUR/USD) is quoted at 1.07168, indicating a 0.07% decline compared to the opening levels on Thursday.

Having maintained a bullish stance since November 2022, HSBC now anticipates that the upward momentum observed in the EUR and GBP has reached its peak. The bank expects these currencies to begin a descent in the near future.

Projections suggest that the Euro to Dollar exchange rate (EUR/USD) may decline to 1.02 by mid-2024.

Likewise, the Pound to Dollar exchange rate (GBP/USD) could decrease to 1.18 within the same timeframe.

These forecasts imply that the Euro to Pound exchange rate (EUR/GBP) will continue to fluctuate within its current range, given the similarity in the domestic economic challenges faced by both regions.

A significant portion of this pessimistic forecast is rooted in the deterioration of cyclical indicators. Consumer confidence and Purchasing Managers' Index (PMI) data, which had previously indicated signs of recovery, are once again showing signs of weakness.

"Changes in consumer sentiment have tended to be good lead indicators of FX performance in this region. Now that those gains are slowing, it is hard to see much cyclical upside for these currencies", says Mackel.

Moreover, manufacturing PMIs have been lackluster for an extended period, and now service sector PMIs are mirroring this trend.

Three key factors that were once supporting consumer sentiment are now waning.

The significant decline in wholesale energy prices is losing steam, suggesting that consumers won't experience the same incremental advantages they enjoyed recently.

Labor markets, which were previously tight, are now showing signs of easing, especially in the UK, where unemployment rates are climbing, and redundancies are on the upswing.

Furthermore, the repercussions of higher interest rates are becoming more noticeable, especially within the housing sector.

"In the UK, housing activity is stalling, with new mortgage approvals stagnating around post-GFC levels and house prices falling at their fastest pace since then too", Mackel adds.

Mackel also underscores the transition from cyclical growth indicators toward a more enduring state of fragility.

Significantly, household consumption in both the Eurozone and the UK lags behind that of the United States.

This sluggish recovery prompts inquiries regarding the foundational robustness of domestic demand within these regions.

Conversely, the US household sector exhibits resilience, both throughout the pandemic and in its aftermath.

As a result, the imperative for the European Central Bank (ECB) and the Bank of England (BoE) to sustain a hawkish stance may diminish, particularly in contrast to the US Federal Reserve.

Regarding rate risks, market dynamics suggest a potential shift favoring the US Dollar (USD).

Mackel suggests that both the European Central Bank (ECB) and the Bank of England (BoE) might soon reach the end of their respective cycles of interest rate hikes.

Upon this development, market sentiment could lean towards the possibility of a rate reduction.

Lastly, external factors, particularly connections to global equity performance, must not be underestimated.

The possibility of a worldwide slowdown, initially driven by the US and then by China's tepid post-pandemic recovery, could exert unfavorable pressure on the Euro (EUR) and Pound Sterling (GBP).

Unless there is an enhancement in the global outlook, these two currencies could encounter significant hurdles in the foreseeable future.

‍