One of the most-traded forex pairs, the British pound (GBP) to the US dollar (USD) has declined over 7% in the past seven months, despite the Bank of England (BoE) looking set to start hiking interest rates before the US Federal Reserve (Fed).
In this article, we take a closer look at what has been driving the pair’s rate both fundamentally and technically, as well as recap some analysts’ latest pound to dollar predictions.
How has GBP/USD moved so far in 2021?
In 2020, GBP/USD fell as the pandemic hit the UK and investors feared the impact that Covid-19 and the resultant lockdown could have on the nation’s economy. The pair fell from around 1.3250 on 1 January 2020 to a low of 1.1477 on 19 March 2020.
It rebounded off this nadir quickly as vaccine optimism and a Brexit agreement drove demand for GBP higher. The pair started 2021 above pre-pandemic levels at around 1.3690 and reached 1.4247 on 31 May, a level not seen in nearly three years.
However, the pair failed to hold this level and has been trending lower since June until, as of the time of writing (14 December), it continues to hover below 1.33.
The BoE drags on the pound
The pound’s recent fall has followed the latest BoE monetary policy meeting. On 4 November, the British central bank surprised the market by voting to keep monetary policy unchanged and interest rates at the historic low level of 0.1%, despite also predicting that inflation in the UK could rise to 5% by next spring.
The monetary policy committee voted 7-2 to keep interest rates unchanged, a much less hawkish vote than the market had been anticipating. According to CME Group, the BoE watch tool had shown that the market was fully pricing in an interest rate rise at the November meeting.
Following the latest BoE announcement, Governor Andrew Bailey said that it had been “a very close call”. However, he added that policymakers at the BoE “still needed to see hard evidence, particularly over the state of the jobs market and how the ending of the furlough scheme has affected the job market and wages before hiking interest rates.”
Bailey doesn’t consider that there’s a clear line of vision or sufficient hard evidence to make a decision on rates.
Bailey also said that the BoE looks into the causes of high inflation. He noted that the BoE raising interest rates wouldn’t solve the energy crisis, supply chain issues and chip shortages, which were behind the increase in inflation, driving consumer prices to 3.1% in September 2021 compared to September 2020 – well over the BoE’s 2% target level.
That said, the BoE policymakers did signal their intention to hike interest rates sooner rather than later, potentially at the December meeting.
The Fed starts to taper and US jobs data impresses investors
Meanwhile, the US dollar has been gaining ground, boosted by the Fed taking a step towards tightening monetary policy. During the monetary policy meeting of 2-3 November, the US central bank announced the start of the scaling back of monthly bond purchases. The Fed said that it would taper the $120bn a month asset purchase programme by $15bn a month.
The central bank was keen to stress that tapering bond purchases doesn’t automatically lead to a hike in interest rates. Federal Reserve Chair Jerome Powell added that there was still ground to cover towards full employment before the central bank would consider raising interest rates.
The US dollar continued to advance following the release of the US Bureau of Labour Statistics employment data. The closely watched non-farm payroll report revealed that 531,000 jobs were added in October. Both August and September numbers also received upward revisions by 117,000 and 118,000 jobs, respectively, to 483,000 and 312,000. Furthermore, the unemployment rate also declined by 0.2% from 4.8% to 4.6%.
Encouraging US jobs data could indicate that the labour market recovery is on track and things are on course for the Fed to hike interest rates.
GBP/USD chart: the technical analysis
After reaching a three-year high in May, GBP/USD has been trending lower, forming a series of lower highs and lower lows. At the time of writing (14 December), the pair was trading 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, in September.
The Relative Strength Index (RSI) was pointing northwards but at below 50 is in bearish territory, suggesting that more downside could be on the cards.
Sellers could be looking for a move below 1.3417, the year-to-date low hit on 29 September. Beyond there, sellers could target 1.3400, before looking towards 1.3300, a strong support in early December 2020.
On the upside, buyers could look for a move over 1.3611, the 3 November low, to expose the 50-day SMA at 1.3695.
During the first week of November, the pair saw its steepest sell-off in six months. Has the pair finally reached a floor? Let’s take a look at the possible GBP/USD outlook and trend according to market experts.
Pound to dollar forecast: where do some analysts see the pair heading at the end of 2021 and beyond?
Analysts at ING believe that the BoE could raise interest rates in December, followed by two more rate hikes in 2022, which is slightly below the four hikes that the market has been pricing. They point out that the fact that only two members voted for a rate rise at the meeting could suggest that support is likely to be lacking for a rapid tightening cycle. In their GBP to USD prediction, analysts suggested that GBP/USD could rise to 1.38 in the current quarter before steadily falling across the coming year, reaching 1.34 in the third quarter of 2022.
Meanwhile, Citibank is slightly more downbeat regarding the pair’s prospects. In their GBP/USD forecast, analysts expect the pound to weaken against the dollar over the coming three months to 1.33 and then continue falling to 1.29 across a 6-to-12 month period. They said:
Fiona Cincotta, senior market analyst at City Index, is more upbeat regarding the pound’s prospects. In her GBP/USD analysis to Capital.com, she wrote:
In its algorithm-based pound vs dollar forecast, Wallet Investor predicted the pair’s rate to weaken in the near term. At the time of writing (14 December), the GBP/USD rate was forecast to edge lower to start 2022 at 1.315. However, over the longer term, the website’s GBP/USD analysis suggested the pair could rise to close 2022 at 1.359, 2023 at 1.394, 2024 at 1.43 and 2025 at 1.465.
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 always recommend that you do your own research and consider the latest market trends and news, technical and fundamental analysis, and expert opinion before making any investment decisions. Also, keep in mind that past performance is no indicator of future returns and never invest money you cannot afford to lose.
You can trade forex pairs 24/7. However, one of the most popular times to trade GBP/USD is when the market is most active, which occurs when the windows for the relevant trading days overlap between 13:00 and 16:00 GMT.
One of the main factors that drive the GBP/USD rate is the economic health of the respective countries (in this case, the UK and the US), and the respective monetary policies that the Bank of England and Federal Reserve put in place. When there is divergence between the state of the economies and two central banks’ chosen paths, one currency will advance against another.
Covid-19 developments, economic growth and inflation, among others, are key factors to when each central bank could start raising interest rates.
The future of the GBP/USD rate will depend largely on when the respective central banks, the Bank of England and the Federal Reserve, look to hike interest rates. Should the Fed slow the timeline for hiking interest rates, GBP/USD could rise. Similarly, if the BoE steps up its pace to tighten policy, the pair’s rate could increase.
You should do your own research and keep in mind that past performance is no indicator of future returns.
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