GBP/USD Rate Forecast Downgraded to 1.20 at HSBC 

• GBP/USD seen slipping to 1.20 by March 2023 
• USD rally, UK growth worries drive downgrade
• But losses to leave GBP 10-15% undervalued 

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The Pound to Dollar exchange rate limped into the end of a torrid April month while carrying its largest one week decline since June 2021 but its descent could yet have further to run, according to HSBC, which downgraded its 12-month forecast to 1.20 this Friday.

Pound Sterling had fallen close to two percent against the Dollar for the week by Friday, taking its April loss to more than four percent in month-end trading following a barnstorming performance from the U.S. currency, which strengthened broadly against G20 counterparts.

While the Pound-Dollar rate edged higher throughout much of the Friday session, it had traded as low as 1.2411 on Thursday and HSBC says that its losses are likely to extend further due to both domestic and international factors.

“The escalation of the war in Ukraine, alongside a more challenging growth outlook in China in the wake of renewed COVID-19 lockdowns, has created a big decline in risk appetite. Forward-looking indicators of global growth point to further downside, and geopolitical challenges show little sign of abating,” says Dominic Bunning, head of European FX research at HSBC.

Above: Pound to Dollar rate shown at daily intervals. Click image for closer inspection.

While the strengthening Dollar and international factors were the prominent drivers of the Pound-Dollar rate’s latest leg lower, which took place in a week that was devoid of major events or appointments for the UK economy, HSBC’s forecast downgrade was also motivated by domestic considerations.

“It isn’t just the external story. If anything, GBP’s very recent sharp decline was triggered by a raft of negative consumer data released on Friday, 22 April,” Bunning and colleagues wrote in a Friday research briefing. 

Sterling came into the current week already carrying large and earlier losses of a similar magnitude to those sustained during the last trading sessions of April after March retail sales figures and April’s IHS Markit PMI survey caused an upset last Friday.

Retail sales slumped by -1.4% last month while February’s fall was revised from the initially reported -0.3% to -0.4% in the first official indication that surging energy and food costs are cannibalising spending that would otherwise flow to other parts of the economy. 

In addition, April’s IHS Markit Flash PMI survey suggested that activity in the UK’s breadwinning services sector moderated sharply this month, while all of the above referenced figures were themselves coming hard on the heels of official data revealing slower-than-expected GDP growth for February.

Above: Pound to Dollar rate shown at weekly intervals with Fibonacci retracements of 2020 recovery indicating possible medium-term areas of technical support for Sterling and resistance for the Dollar. Click image for closer inspection.

“This will make it very difficult for the Bank of England to deliver anything close to what is priced into the forward rates market. The BoE’s recently more dovish tilt compared to its peers is also notable and gives added downside momentum to GBP, in our view,” Bunning says. 

February’s retail sales report was also the first official illustration of what the Bank of England (BoE) meant when it said in February and March that the current squeeze on household incomes would be likely to erode economic demand and contribute toward reducing inflation over coming years.

That is in turn likely to be a part of the reason why Governor Andrew Bailey said during the early days of April that the BoE will have to effectively walk a tightrope when judging the extent to which UK interest rates might need to be raised further during the months ahead.

“Therefore, we are moving our forecast for GBP-USD to 1.20 in the year ahead (previously 1.30). This would align the pair with the lower part of the post-Brexit range, and points to a relative cheapness of around 10-15% compared to our estimates of fair value,” Bunning said. 

“This represents cyclically driven weakness, albeit a notable one, rather than structural weakness,” he added.

Above: Pound to Dollar rate shown at monthly intervals. Click image for closer inspection.