The UK pound (GBP) against US dollar (USD) forex pair is trading nearly 1% higher so far this month but has struggled to push much beyond 1.36. With the Bank of England (BoE) and the Federal Reserve (Fed) possibly set to hike interest rates sooner than had been initially anticipated, could there be more upside for the pound?
This article looks at the currency’s key drivers and the latest forecast for GBP from some forex analysts for the rest of 2021 and beyond.
What has been happening to the UK pound recently?
The GBP/USD rate plunged in March 2020 as the pandemic took hold in the UK. The pair dropped from 1.3000 in mid-February 2020 to a low of 1.1477 on 19 March amid fears over the negative impact that Covid-19 could have on the UK economy.
The pair rebounded off this nadir and steadily moved higher across the rest of 2020, reaching pre-pandemic levels in August 2020 and starting 2021 at 1.3690, nearly 20% higher that the March 2020 low.
The UK’s rapid rollout of Covid-19 vaccines helped boost the pound relative to its peers in early 2021, as did a Brexit deal finally being agreed with the EU. GBP/USD reached a high of 1.4217 in February 2021, a level last seen in April 2018. After slipping lower in March and April, the pair’s rate grew to trade around the 1.4000 level during May and early June. Then, sterling started to weaken against the USD once again. The pair had been moving lower during the third quarter of the year, hitting a year-to-date low of 1.3417 in late September.
More recently, however, it’s rebounded off recent lows amid growing expectations that the BoE could move to tighten interest rates sooner than later. At the time of writing, 14 October, GBP/USD was trading around 1.370.
All the things investors may want to keep an eye on
In the latest BoE meeting, policy makers voted unanimously to keep interest rates at record low levels of 0.1%. The vote over whether to continue its quantitative easing (QE) asset purchasing programme unchanged saw the committee split 7-2. The majority preferred to complete the programme as it is. However, this was a more hawkish vote than previously, with Sir Dave Ramsden, the BoE’s deputy governor for markets and banking, joining Michael Saunders in voting against.
The BoE’s monetary policy committee noted in this meeting that inflation was now expected to peak at a higher rate as it continues to move away from the bank’s 2% target. In a letter to the Chancellor of the Exchequer to explain the overshoot in inflation, BoE Governor Andrew Bailey highlighted the impact of rising energy prices, supply chain bottlenecks and shortages, particularly in semiconductors, as contributing to the rise in prices, in addition to the effect of the economy reopening after the pandemic.
Bailey noted that rising wholesale electricity and gas prices are being passed to consumers, increasing bills for households and businesses. Furthermore, the price of crude oil surged to a seven-year high this week amid the ongoing energy crisis. With gas and coal prices also rising, oil has become an attractive and relatively cheap alternative for power generation, meaning that prices at the petrol pumps could continue rising, driving inflation higher.
These inflationary pressures could well mean that the BoE raises interest rates sooner than initially planned. Sauders confirmed these market fears in an interview with the Telegraph. The BoE policy maker said:
Finally, UK labour market data released in October also supported the case for the BoE to start hiking interest rates sooner. The Office of National Statistics (ONS) labour market report revealed that 207,000 jobs were added in September, taking total payrolls back to pre-pandemic levels. The unemployment rate slipped lower to 4.5% and average earnings including bonuses remained elevated, although eased slightly to 7.2%, down from 8%.
Finally, the number of vacancies for July to September topped 1.1 million for the first time since records began in 2002, suggesting that the labour market is strong enough to absorb those being released from the government’s furlough scheme as it expires.
At the time of writing (14 October), according to CME’s BoEWatch Tool, the UK’s central bank is expected to start raising rates in December this year.
These latest GBP news developments are helping the pound gain against other currencies such as the euro and the Japanese yen. However, an increasingly hawkish outlook from the US Federal Reserve (Fed) has caused the pound to struggle to push meaningfully past 1.36 against the USD so far in the fourth quarter.
The Fed has grown more hawkish over the past few months. In its latest statement, it hinted that the time was drawing close when the Fed could start to taper bond purchases. The market interpreted remarks from Fed Chair Jerome Powell made on 22 September as a nod towards tapering bond purchases by the end of the year.
The market has taken on board that the Fed could be set to taper this year. Attention is now switching firmly to when the US central bank could look to hike interest rates. The dot plot shows that after the September meeting policy makers are now evenly split over whether to raise rates as soon as next year.
The technical picture: what might be coming next for the GBP/USD rate?
GBP/USD has been forming a series of lower highs and lower lows since early June. The pair trades below its 50- and 200-day simple moving averages (SMAs). The 50-day SMA crossed below the 200-day SMA in a death cross, a bearish signal.
GBP/USD found support at 1.3417 on 30 September, the year-to-date low. The rate has managed to rebound but appears to have run out of momentum around the 1.36 level.
Sellers might look for a move below 1.3540, last week’s low, in order to bring 1.3411 in focus. A break below this level could prompt a deeper sell-off towards 1.3200.
On the upside, buyers might wait for a move above 1.3675, the October high, which could open the door to 1.3740, the confluence of the 50-day SMA and the falling trendline.
Now, let’s take a look at analysts’ latest pound predictions.
Analysts’ take: where next for the GBP/USD?
In their British pound forecast, analysts at ING see the currency being supported by the BoE, saying that it’s prepared to tighten monetary policy over its forecast cycle. They said:
The bank’s analysts expect the GBP/USD rate to rise over the coming quarter, ending the year around 1.3800, before moving lower during the first and second quarters of 2022 and then stabilising around 1.3400 by the third quarter of next year.
Market analyst at Think Markets, Fawad Razaqzada, also considers that the pound sterling will be underpinned near-term, but more so against other currencies rather than the US dollar. He said in an email to Capital.com:
In the meantime, forex analyst at FXStreet, Yohay Elam, is less upbeat over the outlook for GBP. In his GBP analysis sent to Capital.com, he wrote: “GBP/USD will likely end the year lower than current levels, perhaps around 1.30. Supply chain issues are dogging the global economy and Britain's strains are exacerbated by Brexit, as recently seen by the petrol dry up.
According to algorithm-based website WalletInvestor, the GBP future value is expected to weaken in the near term. At the time of writing, 11:45 GMT on 14 October, the GBP/USD rate was forecast to edge lower to end 2021 at 1.3537. Over the longer term, the service’s GBP prediction suggested the pair could rise to close 2022 at 1.3854, 2023 at 1.4171, 2024 at 1.4478 and 2025 at 1.4799.
Note that this article does not constitute financial or investment advice. Keep in mind that analysts and online forecasting sites can and do get their predictions wrong. We recommend that you always do your own research and consider the latest market trends and news, technical and fundamental analysis, and expert opinion before making any investment decisions. And never invest money you cannot afford to lose.
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Back in 2007, the GBP/USD pair traded around the 2.00 level. This suggests that the pound was stronger versus the US dollar then than it is now. Brexit uncertainty and the ongoing Covid-19 pandemic has weakened the British currency considerably over the past few years, taking GBP/USD to a low of 1.14 in March 2020. As of October 2021, the currency has recovered nearly 20% from its pandemic low versus the US dollar.
If the BoE moves towards raising interest rates, the value of the British pound may rise. On the other hand, if the central bank stays more cautious, the GBP value could decline.
Some analysts see GBP/USD hiking by the end of the year before easing lower next year. Whether you believe market analysts' BP stock predictions is up to you. It’s always vital to carry out your own research. Keep in mind that past performance is not an indicator of future returns.
The principal driving factors behind the pound are typically Bank of England monetary policy, inflation and the economic growth outlook. When the BoE decides to raise interest rates, often the trend of GBP would be higher. Interest rates are often raised when inflation overshoots the BoE’s 2% target.
Brexit and the Covid-19 pandemic have also become a driving force behind the pound.