GBP is caught in the crossfire between negative developments surrounding the EUR and USD. When Eurozone sovereign risk is dominating market focus, GBP outperforms the EUR but underperforms the USD.
Alternatively, when the market is in the mood to punish the USD, GBP outperforms the USD but underperforms the EUR. Here, EUR-GBP rises as the ECB attempts to normalise monetary policy. On the margin the market has given GBP a slight advantage versus the USD because the UK is ahead of the curve in trying to deal with its fiscal problems. However, given fears over the impact this could have on the UK economy and the coalition, the market does not want to push GBP too aggressively higher against the USD.
For now, it is the changing dynamics of the EUR and USD that are impacting GBP rather than a specific GBP story itself. For GBP to trade independently, we need to see a dramatic change in the UK economy either for the better or for the worse.
HSBC Global Research