GBP/USD is a popular and widely traded Major currency pair. It is the pair most often traded by novice and professional Forex traders alike
During the early part of 2021, the British pound sterling (GBP) has been a strong performer against the US dollar (USD). The price rose by as much as 3.1% in February, which was a near three-year high. That was the fifth month of gains for the pound vs dollar exchange rate.
There is still a lot of economic uncertainty, and UK fundamentals continue to be fragile with budget deficits and the current account deficit, potentially limiting independent currency gains. Any predictions made are based on technical analysis, with a clear side view on fundamental analysis.
From the dollar side, the Bank of America expresses cautiousness. They said, "Despite the short-term GBP strength following the Brexit deal and the faster vaccination rate, we remain long-term bearish because Brexit reduces the growth potential of the economy."
A world pandemic has ironed out assumptions of expectations but, if progress continues with moving out of the pandemic to some semblance of economic normality, this can only be a good thing for the rise of the pound sterling.
What is a Pound to Dollar Pair (GBP/USD)?
The GBP/USD is a major currency pair as it represents two of the most influential currencies – the UK pound sterling and the United States dollar. GBP is the base currency, and USD is the quote currency. It is a strong currency pair and popular with Forex traders because once a trend starts, it can ride for a long time before correcting or reversing.
GBP/USD is sensitive to economic news. Any uncertainty or instability will reflect in the price of the currency pair. When considering trading the GBP/USD, it is crucial to do fundamental analysis and technical analysis to anticipate or get ahead of potential price swings on financial or policy announcements.
What Affects GBP/USD?
The value of GBP/USD, like most currency markets, is driven by macroeconomic data such as:
- Gross Domestic Product (GDP) growth rates
- Interest rates
- Inflation
- External trade.
These four things are a measure for the overall economic health of a country's economy, and they influence whether investors will want to exchange currency for investments. When sentiments are running high, investment follows, but if economic concerns emerge from hard data, the market dumps currency to avoid losses.
What Caused the Rise of GBP/USD?
GBP/USD has been rising since March 2020, when the UK went into the first lockdown. At the time, the US dollar weakened on low-interest rates and didn't, at first, outline a process to support businesses during the pandemic.
The Covid-19 pandemic created significant global uncertainty. For a good while, there was no end in sight. With many high street businesses forced to close and the catering and entertainment industry on its knees, any positive news could only be good for GBP, and that is what happened next.
The UK rolled out the successful Covid-19 vaccination process with almost military precision as millions of people were vaccinated every week, faster than any other European country so far.
According to the UK Coronavirus data site (April 19th 2021), 42.8 million people have been vaccinated, with 9.93 million (14.9%) with full vaccination status (April 2021).
The high vaccination rate has created an optimistic outlook for some semblance of normality for UK businesses by summer 2021.
The Prime Minister, Boris Johnson, outlined positive plans to get businesses back up and running by the end of June. The Covid infection rate was dropping sharply, and both UK businesses and the public were feeling a renewed optimism for the future.
The Bank of England (BoE) adopted negative interest rates at first. Recently, there has been a shift in expectations, and the bank downgraded short-term forecasts due to the restrictions enforced by the pandemic. BoE said it expects a strong recovery of the economy later this year. That said, the BoE said it anticipated it would take at least six months before being in a position to implement negative interest rates on the grounds of operations.
The pound sterling was gaining value because the Brexit process established some level of certainty for businesses, which helped to give rise to the pound sterling dominating against the US dollar.
At the beginning of the year, the GBP/USD price was 1.36, and it peaked at 1.42 on February 22nd. Typical for most currency pairs, after a prolonged rise or fall, the price always corrects. Subsequently, the price dropped to the bottom of a historical support zone at 1.3670. Now (April 19th), the price is pushing back up to 1.39, and the pound sterling is looking strong against the dollar.
The above image shows GBP/USD February 21st 2020 to April 19th 2021
On March 9th 2020, the price started an epic drop from 1.32 to an all-time low of 1.14 on March 18th 2020. This price action reflects uncertainty as rumours began circulating about a pandemic in China possibly spreading worldwide.
Uncertainty always reflects on the financial markets and, with no exception, it caused temporary chaos on the Forex market. On March 23rd, Boris Johnson announced a 3-week UK lockdown, and there were clear, and emerging, guidelines on expectations for businesses. The UK government were thinking on their feet. With no frame of reference for dealing with a pandemic, they had to inspire some trust in handling the pandemic efficiently.
Whether they did or not is a divided opinion, but within a year, the prime minister appeared to be in charge of direction.
From that point on, the GBP/USD has been rising. The charts show a few price corrections but never dipping back to the low of 1.36
How far can GBP/USD go? Will the dollar continue to be weak? Or will gains be capped now and see a reversal to the downside? What can you expect for the foreseeable future?
This article will consider the analytical expectations for the outlook for GBP/USD for 2021 and beyond.
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Will the GBP/USD Price Reverse?
Brexit is affecting trade flow between the UK and the European Union (EU). The delays have caused issues for UK business.
Import and export costs are rising, primarily due to delays in deliveries and increasing bureaucracy. These issues could weaken trade with one of the world's largest economies, and, ultimately, this would affect economic growth. The trade agreement at the end of 2020 only covers goods. Realistically, the financial services sector drives UK economic growth.
The relationship between the UK and the EU has been somewhat strained regarding services, and it is deteriorating. On March 15th 2021, the EU threatened to initiate legal action against the UK, stating that they are breaching international law by unilaterally extending a grace period until October on custom checks at the Northern Ireland and Republic of Ireland border.
If the UK and the EU do not reach an acceptable agreement, this will affect the value of the pound sterling.
In the United States, the government approved a $1.9tm economic stimulus package that negatively affected the dollar. The positive news was of the rising US Treasury yield and optimistic expectations that the US Federal Reserve may start lifting interest rates before 2023.
With the EU disputes and the US uncertainty, what do analysts expect for the GBP/USD for the remainder of 2021?
Short-Term Pound to Dollar Price Prediction
The pound is looking strong at 1.39, heading up towards 1.40 (April 2021).
The above image is the 4-hour GBP/USD chart showing a parallel channel and support lines. GBP/USD is gaining momentum after breaking through and retesting a trendline. The price got temporarily stuck in a range for two days as it tested resistance. The 1-hour candle has closed above the last high of April 6th.
You can see that the price is approaching key support and resistance area (between the two black lines). From February 21st to March 23rd, the price consolidated in a range before breaking through support. Then the price fell to the bottom of the channel at 1.3670, which it retested on 9th and 12th March, where it then began its rise upwards.
As the price pushes up to 1.40, the next high would be 1.42.
Short-term, if the price breaks through 1.40, the likelihood is that a target of 1.42 could be possible. But, traders should proceed with caution.
GBP/USD Price Prediction for 2021
There is support for the pound for the remainder of the year. But currency analysts are cautious on further moves to the upside.
On March 16th, analysts at Dutch bank ING said in their latest GBP/USD analysis: "Sterling largely shrugged off the news on the EU commencing legal action against the UK's recent moves to unilaterally override parts of the Northern Ireland protocol. As any imminent decision seems unlikely and the process may take time, any negative impact on GBP should be limited."
"Equally, with many EU countries suspending AstraZeneca vaccinations, yet no such signals coming from the UK (with the UK already doing more than double the EU's AstraZeneca volumes yet not detecting material problems), the narrative of GBP continuing to reap the benefits of the fast vaccination programme remains intact."
Germany's Commerzbank Analysts suggested a mixed outlook in their pound to dollar prediction for 2021. They say, "Expectations that the pandemic will end soon and hopes of normalisation should support the pound in the short term. However, we maintain our view that the consequences of Brexit should favour a weaker pound in the medium to long term.
"The BoE, for example, is likely to maintain an expansionary monetary policy for a long time to come. Even though it may start to roll back its QE programme already this year, it is likely to clearly signal that it will not hike rates anytime soon."
They also said, "This, as well as a weak or uncertain economic outlook, suggest that the pound will lose ground again against the euro later this year and at least stop its appreciation trend against the US dollar, which should do much better this year than last thanks to positive growth prospects."
The Commerzbank analysts forecast a price of 1.36 by the end of June 2021. They suggest it may be followed by a rise to 1.38 by the end of September and dropping to 1.37 by December, where they forecast the GBP/USD may stay around this price for 2022.
The US-based Citibank provides a one-to-three month GBP/USD forecast of 1.40, a six-to-12 month forecast of 1.39 and a long-term outlook of 1.40.
On March 15th, Citibank announced its predictions based on technical analysis.
They said, "GBP/USD quickly regained February 2016 low and a rising channel base at 1.3834-36. Back in 2018, there was a sharp rebound that pushed GBP/USD above the previous trend high following a short-lived correction. Similar price action now may push GBP/USD above the previous trend high at 1.4237 to test a crucial resistance range at1.4281-1.4377. Meanwhile, support lies around the pivotal 1.3657-1.3759 area."
The analysts at Citibank added that "political risks for the cable may start to become more visible in the next two months as the UK goes to local elections and Scotland elects its parliament, which may limit GBP's performance. Citi's base case is for the Fed to taper in Q4 2021. This could cause higher US real yields and a stronger DXY. This may also weigh on GBP".
French bank BNP Paribas predicts a bullish move on the pound, with a three-month GBP/USD prediction of 1.36 and a 12-month target of 1.45, which would be the highest level for GBP/USD since the Brexit vote in 2016.
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What Will Happen to The Price of GBP/USD In 2021?
Much will depend on what happens within the UK and US economy emerging from Covid-19 restrictions. Businesses will try to claw back business losses over the last year, encouraging consumer spending and putting faith back in the economy.
As the lockdown eases and the UK incidents of Covid-19 cases continue to fall, the economy has a chance to right itself. What happens next with GBP/USD depends on not having a third spike of the pandemic, forcing the government to impose another lockdown and close down businesses.
As it stands, the pound sterling is gaining momentum after a price correction, but the next move will depend on whether the price breaks support at 1.40. If the price pushes through and comes back for a retest, 1.42 would be a logical target to aim for, with the next target at 1.4365.
To reach the price of 1.50 GBP/USD has these areas of resistance to push through. If selling pressure is intense at these price zones, it could force the price back down to 1.38 or even 1.36.
To know what will happen with GBP/USD in 2021, analysts and traders have to marry fundamentals with technical analysis for both countries, looking to spot areas of strength and weaknesses in government policies, interest rates, unemployment rates, GDP and inflation.
Will the Price of Pound/Dollar go up in 2021?
With the fast rollout of the vaccine, the anticipation is that it will boost the economic recovery of the UK. As businesses start reopening their doors, the outlook is positive buoyed up by the reduced expectations of the BoE deploying negative interest rates.
If the global economy secures a strong recovery, this may amplify the scope for the pound sterling.
There are diverging forecasts for GBP/USD. Bullish banks suggest an expectation of a rise to 1.50 or above by the end of 2021. At the opposite end of the scale, bearish banks suggest a fall to 1.20.
Global trends can also amplify pound sterling increases. As the world takes off the heavy winter coat of Covid-19 and gains strength, the demand for defensive assets weakens and the demand for risk assets, such as the pound, increases, and the dollar demand would weaken. If global improvements are significant, there is scope for substantial gains in GBP/USD.
The next few weeks and months are critical to measuring what may come next. Any lack of confidence in global recovery and investors lose their appetite for risk. There would be renewed pressure to sell currencies such as the pound sterling, and the dollar could regain power.
Long-Term Pound to USD Price Prediction: 2022-2025
Almost seven years ago, in June 2014, the sterling pound was at a high of 1.71, but, since May 2016, the price hasn't managed to rise above 1.50. It got as high as 1.4335 in April 2018 but has stayed well below that ever since.
The image above is the monthly chart for GBP/USD. Interestingly, the price has formed a triangle pattern. The first low was September 2016, and the second low was March 2020. Before that, the price got stuck in a 200-pip range, with the low at 1.50 and the high at 1.70 in July 2014.
Will we see highs like this again on the GBP/USD chart?
On the monthly chart, analysts can form a clear indication of historical price. With such a large triangle, it is something to consider for the technical analysts as a possibility.
However, the general consensus from price forecasters is the opposite of this view.
Image courtesy of AI Pickup
In the above image, there is a rejection of 1.40, followed by a period of uncertainty between 1.39 and 1.37. Then in May 2021, a staggering 2.5-year descent to a price of 1.0. By May 2025, the price still shows slight growth to 1.1 but, for the next six years, a gradual climb back up to 1.40.
With the current momentum of GBP/USD, it's a challenge to imagine a dip to 1.0. What would it take for the price to drop that low? A global crisis could impact the price so dramatically.
If the third spike of Covid-19 occurred, an increase in cases or deaths would drive the UK back to uncertainty, and all gains could be lost. Or the ongoing EU litigation debacle could create a loss of support for the pound sterling, should it result in negative consequences for the UK, such as significant trading costs.
As it stands, GBP/USD is more likely to formulate a range between the current high and either 1.38 or 1.37. Like most currencies, the price tends to consolidate for a while until moving off to a new high or low.
What's Ahead for 2021 for the United States?
As this article has focused on the economic growth of the United Kingdom, we'll take a look from the United States angle and see what President Joe Biden has in mind for economic growth.
Joe Biden's campaign appealed to the middle class. He campaigned to extend healthcare, raise taxes for the wealthy and invest heavily in green energy infrastructure.
How will he deal with the mounting costs of navigating the coronavirus pandemic? How will he handle the fallout from the last year, with the significant damage to the economy?
Listed below is President Biden's COVID-19 stimulus plan and larger policy goals.
Joe Biden's Economic Policy: Top Line Agenda
- The $1.9 trillion American Rescue Plan, the first leg of Biden's economic plan, is the law.
- Provide health insurance coverage for 97% of Americans in 10 years.
- Raise an additional $4 trillion in tax revenue by increasing the top tax rate to 39.6%, taxing capital gains at ordinary rates, and raising the corporate tax rate to 28%.
- Forgive student loan debt and make college free for those making up to $125,000.
- Raise the minimum wage to $15 an hour and repeal "right to work" laws.
- Expand "Buy American" policies through government purchasing, while using subsidies, federal matching, and incentives to make American products more competitive.
- Invest $1.3 trillion in infrastructure over 10 years.
- Spend $2 trillion on clean energy during his first term as president.
Data courtesy of Investopedia
Conclusion
For 2021, investors will focus on fundamentals first and technical analysis second. They may be looking for the fallout from the pandemic. They will be monitoring the next quarter's growth and the results of the EU situation with the UK.
If Joe Biden fulfils his policy promises, United States citizens will recapture faith in its country. This faith could materialise as confidence and an increase in spending and investment in business. But it's a big ask.
Covid-19 has wreaked havoc on most countries, but the United States was hit hard and experienced further instability with a change of Presidency and Trump's less than graceful exit. To rebuild economic strength is going to take time, and Joe Biden has a lot to prove.
The UK handled the rollout of the vaccine incredibly well, and the public is feeling restored as a nation. Boris Johnson is gaining some respect as a Prime Minister for handling a situation that any Prime Minister hopes never to have to face.
The pound continues to gain strength, and confidence is already felt at consumer levels as people want to go out and enjoy a normal life, spending their money and getting back to work.
It's never easy to make predictions on a currency, and Covid-19 added to the mix of uncertainty. But, on balance, for 2021, the pound sterling is looking like the better option as a currency, based on fundamental comparisons between the United States and the United Kingdom.
Please note that the above information is not providing advice on tax, investment, or financial services. We provide the above information without consideration for risk tolerance and a specific investor's financial circumstances.
Trading or investing in financial instruments such as Forex and EFTs may not be suitable for all investors. It does involve risk and the possibility of a loss of capital.
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