The outlook for GBP/USD looks positive after a few tumultuous years. The currency pair has faced Brexit uncertainty and the Covid-19 crisis.
Despite these uncertainties and risks, sterling remains largely unscathed.
However, it would be ignorant to talk of sterling’s performance only for this year. Did you know that GBP/USD has logged back-to-back gains since 2019?
The pound to dollar forecast for 2021 is bullish. The currency pair is up over 3% this year and holding.
Given the impressive performance, what does the future for GBP/USD look like? Please note that past performance is not indicative of future returns.
When talking about the outlook for GBP/USD, there are many factors to bear in mind. Long-term forecasting can only give you a rough idea of the GBP/USD exchange rate. But there are a lot of variables that can change this view.
The pound to dollar forecast only provides the outlook for the GBP/USD exchange rate given what we know today. A lot can change a quarter or two from now.
Key GBP/USD price drivers today
Talk of inflation is dominating financial markets.
In a climate of ultra-loose monetary policy, consumer prices are running hot globally. Investors are starting to speculate on when the ‘punch bowl’ will be removed.
It’s very likely that any actions on cutting back on QE purchases or raising interest rates, will be gradual and coordinated.
It would be surprising to see the Federal Reserve (Fed), the European Central Bank (ECB) and the Bank of England (BoE) move in sync on monetary policy decisions. This gives us an opportunity to estimate a time frame.
Given the current data, we can expect changes in Q3– Q4 2021.
Keeping an eye on the Bank of England will be essential.
Officials are optimistic on an economic recovery. But as we know, predictions and forecasts are only good on paper.
The key determining factor will be the underlying data.
GDP growth, inflation and unemployment dominate the datasets. But additionally, geo-political risks and trade developments are important for the GBP/USD.
UK Trade Deals
Following Brexit, the UK is negotiating trade terms with almost every country the EU had an existing relationship with.
The markets will closely watch developments on this front. The UK already has a trade deal with Japan.
Trade talks with Australia dominate headlines. The UK’s historic relationship with Australia should make this a relatively straightforward deal, despite some hiccups.
The UK is also in talks with Canada and many other countries.
GBP/USD long-term forecast: what are the risks?
Risks are everywhere. Amid the optimism, it’s important to stay grounded.
For the GBP/USD exchange rate, there are many risks to consider. We will outline the two biggest risks to the GBP/USD future.
Brexit is now almost history
Following Brexit, focus has shifted to the implementation of the EU trade agreement.
The UK and EU enjoy a free trade agreement (FTA) in a post-Brexit world. Formally called the Trade and Cooperation Agreement, the FTA allows the UK to enjoy almost the same benefits as before.
But the UK is no longer part of the EU. This means, disagreements and disputes will arise. We got a glimpse of this earlier this year.
There is no telling what other disputes may come. This will put pressure on the UK manufacturing sector. Investors don’t like uncertainty.
Another Scottish referendum?
The second Scottish referendum is still in its nascent stages. The May 2021 Scottish election results saw the SNP (Scottish National Party) attract the most votes.
It was the SNP who spearheaded the 2014 referendum. Back then, the referendum for an independent Scotland was rejected by a ratio of 55: 45. But things are different now after Brexit.
A second Scottish referendum needs the approval of the UK Government. But the UK’s ruling Conservative party is in no mood to acquiesce. We saw an example of what the Scottish referendum can do to the GBP/USD exchange rate.
What is the outlook for GBP/USD?
The currency pair’s daily chart shows a sustained uptrend. The GBP/USD last made a bullish signal via the golden cross in July 2020.
It’s likely this uninterrupted uptrend will continue over the next month.
In the very short term, we see a consolidation taking place with the GBP/USD failing to make any new highs.
GBP/USD price tested the 24 Feb 2021 highs of 1.4241 before turning flat. This consolidation pattern may see prices snapping back lower.
The next big support level is at 1.3483. This correction could be healthy in the long-term trend. The support level sits close to the 78.6% Fibonacci retracement level as well. This is a level worth watching.
To the upside, as long as the support level holds, the GBP/USD must breakout above the current highs of 1.4241. This opens the way to further upside.
The resistance level to watch on the upside is at 1.4376, which was the 16 Apr 2018 high. A successful breakout above this level puts the GBP/USD on the highway to test the big round number of 1.50.
GBP/USD prediction 2021 – 2022
Combining the fundamental landscape, the risks and opportunities for the GBP/USD future, we make the following observations.
The cable (GBP/USD) is on track to close with gains in 2021
Given sustained three-year back-to-back gains, the 2022 prediction for GBP/USD is that it may turn negative
Overall, the longer-term target for GBP/USD is the $1.50 level
The pound to dollar forecast assumes there are no black swan events - an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences.
The Federal Reserve will continue to play a big role in the long-term GBP to USD forecast
Until 2022, political risks in the UK are low. The next UK general election is not due until 2024
The Scottish referendum could gain traction by Q1 2022. It presents a big risk to the GBP/USD forecast
Slowly but steadily, economists, analysts and ministers are turning hawkish on the UK too.
But there is also a bit of much-needed caution in the air.
Darren Morgan, a statistician at the UK’s Office for National Statistics (ONS), said: "Exports of goods to the EU continued to increase in March and are now almost back to their December level. However, imports from Europe remain sluggish."
Trade British Pound / US Dollar CFD
There are a lot of factors that affect GBP/USD, as with other currency pairs. It is prudent to pay attention to economic numbers, such as GDP, unemployment and inflation. As we’ve already outlined the prospects of higher growth for the UK, these indicators are important to watch.
And always keep your ear open for any black swan events. The 2019–2020 Covid-19 crisis was one such event that no-one was well-prepared for. And just because a black swan event happened recently doesn’t mean it will not happen in the immediate future.
Profits made over the years can get eroded easily during such periods. It’s in the best interest of GBP/USD investors and traders to be wary of any such events
Given the current global outlook, the tailwinds for GBP/USD remain favourable. The Bank of England continues to maintain a positive outlook for GBP/USD.
As long as incoming data is consistent, GBP/USD has the potential to rise and close with positive gains in 2021. Whether you should buy or sell is your decision, based on the information available from your personal research, your risk appetite, the spread of your portfolio and any hedging you have in place, taking into account how much you are prepared to put at risk.
For short term trading, the best time to trade GBP/USD is during European trading hours from 0800 CET to 1600 CET.
Halfway through, when the New York session gets underway, volatility can increase. The best time to trade GBP/USD is when the UK and US sessions overlap.
The benefit of trading GBP/USD then is that with higher liquidity you enjoy lower spreads. With both higher liquidity and volatility, you are able to find good trading opportunities.