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Money Money Money: £/$ Overview

  • 27th January, 2021

2021 Review

GBP/USD trading in 2021 was quite volatile for the opening half of the year. The Pound had advanced over 3% against the Dollar by the end of February, but lost much of that gain in April, only to make it back again with further gains by the end of May, climbing in excess of 1.42. This would prove to be the Pound's high watermark against the Dollar as a steady decline in GBP/USD occurred throughout the second half of the year. Although the UK economy continued to perform well, the benefit the Pound had gained from the UK's impressive vaccine roll out earlier in the year was not enough to resist broad US Dollar strength. The Dollar appreciated as it became apparent the US economy was recovering strongly and inflation was rising sharply. This increased expectations around US Federal Reserve monetary policy tightening and caused the US Dollar to gain steadily throughout Q3 & Q4. This culminated in the announcement in November that the Fed would reduce the Quantitative Easing measures they had put in place in 2020 to support the US economy during Covid. This triggered a further drop in GBP/USD to a 12-month low below 1.32. However, it wasn't all one-way traffic and with the Bank of England getting a step ahead of their US counterparts and raising UK interest rates as the year ended sent the Pound into 2022 on a more positive footing, but still far off the highs seen earlier in the year. 

2022 Expectations

Forecasts Explained; The Mean Forecast is the mean of all the forecasts by banks and major financial institutions who contribute to Bloomberg. Included in the table is also some further forecasts by individual major banks with a preference towards those who have recently submitted forecasts.

Source; Bloomberg

On face value the forecasts suggest a more subdued 2022 for GBP/USD than 2021. The average forecast and individual bank predictions suggest institutions have limited expectations for large moves in GBP/USD. On balance they expect to see a modest appreciation of the Pound against the US Dollar. This limited expectation for large moves is representative of the similar position the US Federal Reserve and Bank of England find themselves in. Both are on a tightening footing, wary of the strong resurgence in inflation, and the market expects both to tighten further in the coming year. This similarity in policy outlook creates an expectation that the Pound and US Dollar are likely follow similar trajectories, giving less opportunity for moves in GBP/USD. However, if Bank of England and Fed policy starts to diverge this could easily be the catalyst for more aggressive moves in GBP/USD. It should be noted that the task both are facing is significant. The US Fed will have to continue to wean a super-charged stock market off loose monetary conditions whilst the UK is still dealing with the lingering affects of both Covid and Brexit. The risk that either might be forced off course, triggering more significant moves in GBP/USD, should not be dismissed.

To conclude, although the forecasts look benign those with GBP/USD exposures should still approach with caution as they are built on delicate assumptions. If circumstances change, we could see sizeable moves within the two-year trading range. This runs from 1.1494 to 1.4204, a sizeable range for GBP/USD to roam within unimpeded by historical resistance if the current situation is destabilized. 

About the Author

Peter has close to a decade’s worth of experience managing the foreign exchange and global payment requirements of international businesses. He has worked at several large UK FX brokerages before joining Fintuitive. Fintuitive is an innovative financial technology firm based in Oxford, UK. They focus on combining the best technology with quality human expertise to help clients reduce costs and drive efficiencies when moving money internationally – If you would like to explore how Fintuitive could help your business email him on