Since the beginning of the year, the pound has had a rather torrid time against the US dollar. Witnessing chronic political and economic uncertainty, Brexit aftermath and a multitude of news on trade talks between the US and China, the future of this currency pair is troublesome.
When the GBP/USD price graph looks nothing else but volatile, everyone wants to know: what is going to happen next? Let’s find out what the pound to dollar forecast 2019 looks like, and whether it is the right time to invest in this forex major.
Background check if you are new to the forex market
The GBP/USD is the British pound and US dollar currency pair, representing how many US dollars – the quote currency – are needed to purchase one British pound, the base currency. The GBP/USD pair is typically referred to as the ‘cable’ due to the undersea cables that used to carry bid and ask quotes across the Atlantic Ocean.
The GBP/USD is one of the top four most-widely traded currency pairs worldwide. There are a number of factors that influence the value of the US dollar and the British pound in relation to each other and other currencies.
That is why the interest rate differential between the Federal Reserve (Fed) and the Bank of England tends to affect the value of these currencies, especially when compared to each other. For example, when the Fed decides to make the US dollar stronger and intervenes in open market activities, the value of the GBP/USD pair might decline.
GBP/USD typically has a positive correlation with the EUR/USD and a negative correlation with the USD/CHF currency pairs. This is due to the positive correlation of the British pound, euro and Swiss franc.
Prior to the Great Recession, the GBP/USD was also highly correlated with the New Zealand dollar and the Australian dollar as investors purchased these high-yielding currencies for carry trading.
GBP/USD outlook: yesterday, today and tomorrow
As the GBP to USD analysis suggests, in recent history, there are two instances where GBP/USD has crashed significantly: in 2009 and 2016.
At first, the British pound’s value fell sharply during the Great Recession. In 2007, the GBP/USD traded to an all-time high over 2.10, right before falling below 1.40 in 2009, losing over a third of its value. In the next five years or so, the currency recovered to trade against the US dollar at around 1.6.
Next incident happened in June 2016. The GBP/USD pair had another dramatic decline when the UK voted to leave the EU. The currency pair fell over 10% in one trading session and lost almost 20% over the month. The decision to leave the European Union was seen by the global community as a negative move for the country’s economy, bringing the uncertainty that led to investors pulling money out of the UK at a rapid pace.
Let’s see what the GBP to USD predictions look like. As of today, there are many factors that have a high influence on the currency pair.
First of all, the ongoing Brexit saga. It has a large impact on the pound’s value and continues to hamper the currency. Moreover, the new UK Prime Minister will be announced on 23 July and is awaited with bated breath. Many are predicting Brexiteer Boris Johnson to take over the Conservative Party, and, as expected, his approach will differ from the one of Theresa May.
The chance of a ‘no deal’ Brexit is serving as a red flag, giving the markets the jitters once more. As we head closer to the next deadline of 31 October and a deal not being in place, the pound is predicted to continue losing its value.
However, if Jeremy Hunt manages to win the leadership election against all the odds, it could have a positive impact on the pound’s value, as Hunt is not keen on leaving the EU without a deal. Therefore, the currency could possibly recover some of its losses.
Additionally, positive trade talks between China and the US brings more support to the US dollar. At the end of June, Xi Jinping and Donald Trump met at the G20 summit in Japan. Both sides have agreed to resume trade talks and hold their fire on new tariffs. The trade truce has been taken positively by the market, strengthening the US dollar performance.
However, markets are still seeing a 100% probability of an interest-rate cut at the Fed’s next meeting, planned for 30-31 July. It is believed the Fed will cut interest rates by 25 basis points (BPS). However, if a surprise cut of 50 BPS happens, it might weaken the dollar significantly.
Pound to dollar forecast 2019: what will the chart look like?
In the past few weeks, the pound’s value has fallen across the board as investors and traders avoid the currency until there is a much clearer path and picture ahead.
Meanwhile, economic data has also been fairly poor as it seems like the country is holding back and waiting to see what happens with Brexit. In turn, this leads to individuals and businesses taking precautions, fewer business decisions being made and the leading sectors slowing. The country’s economy cooled notably in June, with manufacturing and construction sectors contracting while services, the UK's largest economic sector, is barely growing.
The combination of a slowing domestic economy, leadership elections, global economic risks related to the US-China trade tensions and Brexit uncertainty remain the most prominent drivers of GBP exchange rates during the summer period.
According to global investment bank TD Securities, the UK currency is set to remain an underperformer into year-end. However, the possibility of a potential recovery of the pound sterling against the Dollar still exists, as the Fed has set the course for lower interest rates, which should weigh on the US dollar going forward.
Mark McCormick, head of FX strategy at TD Securities, forecasts the UK currency is likely to end Q3 at 1.29 against the US dollar before climbing to 1.30 by the end of the year.
According to what the British pound to dollar forecast tells us, it may not be the perfect time to invest in this forex mammoth. However, you can still try to profit from the GBP/USD volatility through the contracts for difference.
How to trade GBP/USD CFDs
A contract for difference, or CFD, is a financial instrument between an investor and a broker, in which one party agrees to pay the other the difference in the value of a security, between the start and end of the trade. You can either hold a short position, speculating that the price will fall, or a long position, speculating that the price will rise.
If you trade the GBP/USD currency pair using CFDs, you speculate on the direction of the underlying asset, without ever taking ownership of it. It provides you with greater liquidity and easier execution, as well as allows trading on margin. Therefore, no matter whether you have a positive or negative view of the GBP vs USD forecast, you can still try to profit from the future price movements. However, as CFDs are a leveraged product, profits, as well as losses, are magnified.
You can learn more about CFD trading with free online courses and stay on top of the pound to dollar news and GBP to USD trends with Capital.com.
What are your bets on the pound to dollar forecast 2019?