- GBP/USD breakout pressure building as 1.40+ enters pipeline.
- Vaccine success & valuation aid GBP in a FX-concerned world.
- But risk-aversion, vaccines bandage USD's wounds short-term.
- BoE decision & U.S. payrolls highlights of week for GBP, USD.
© Bank of England
- GBP/USD spot rate at time of writing: 1.3705
- Bank transfer rate (indicative guide): 1.3325-1.3421
- FX specialist providers (indicative guide): 1.3499-1.3609
- More information on FX specialist rates here
The Pound-to-Dollar rate lifted Sterling into first place among major currencies for 2021 last week but in the absence of an upset from the Bank of England (BoE) this Thursday, it could remain an outperformer as the UK's vaccine success promotes resilience against any further resurgence of the greenback.
Pound Sterling stumbled at the final furlong on Friday when widespread losses in stock and commodity markets helped it lower against all major currencies ahead of the weekend in price action that was indicative of profit-taking. However, the British currency still clung to its newly-acquired lead over a resurgent U.S. Dollar for the fledgling year as well as over the now-flagging commodity Dollars of New Zealand, Australia and Canada.
The Pound has been boosted by the UK's pole position on coronavirus vaccinations as well as an emerging role for itself in keeping EUR/USD afloat amid a palpable increase in European Central Bank (ECB) concerns about the elevated level of its trade-weighted exchange rate.
"The GBP is benefitting from the reduction of Brexit risk and improving sentiment towards the UK related to the relatively fast roll out of vaccines. The GBP has also become more correlated to other high beta G10 currencies," says Lee Hardman, a currency analyst at MUFG, who's a buyer of GBP/USD and is looking for a move as far as 1.4125 in the weeks ahead. "We expect the GBP’s bullish momentum to extend further in the nearterm."
Above: Sterling Vs the majors over selected timeframes. Source: Netdania Markets. Click for closer inspection.
"The main hurdle to our bullish outlook is posed by next week’s BoE policy meeting. On balance, we expect the BoE to decide against lowering rates next week and refrain from providing a stronger signal over the likelihood of negative rates being implemented anytime soon. If correct, it should open the door to more GBP upside and lift cable towards the 1.4000-level for the first time since 1H 2018," Hardman writes in a Friday note.
Some 11% of the UK population had received their first dose of a vaccine by Friday, placing the government on course to meet its target of 15 million by mid-February and something like herd immunity around mid-year or soon after. The government is supported in its effort by orders for more than 350 million jabs, which is more than five for every person in the country and could see the economy given a headstart in any looming global recovery from the renewed 'lockdown' that closed businesses and grounded households last quarter.
"The prospect of a rapid recovery in GDP in the second half of the year and a rebound in inflation to 2% suggests that the third COVID-19 lockdown won’t prompt the Monetary Policy Committee (MPC) to launch a fourth increase in quantitative easing (QE) at its meeting on Thursday 4th February. And although the MPC will probably confirm that it is moving closer to being able to use negative interest rates, we think it will disappoint the markets," says Paul Dales, chief UK economist at Capital Economics. "Even if the Bank is operationally ready to use negative interest rates right now, it’s not clear that the MPC will want to use them. Recent comments by various MPC members suggest that the divergence in views on negative rates on the Committee has not narrowed."
Vaccine success could be enough to ensure the Bank of England further sidelines or otherwise shelves any ideas about adopting a negative interest rate policy further down the line when announcing its latest policy decision at 12:00 on Thursday. This would remove one large but lingering uncertainty from Sterling's path and could enable another attempt by GBP/USD to break above nearby resistance at 1.3760, which guards the road up to 1.38 and above.
Above: Pound-to-Dollar rate shown at hourly intervals alongside EUR/USD (yellow).
"We think the GBP should eventually firm convincingly above 1.37 to make a run toward 1.40 but the chance that the BoE strikes a dovish note next week may be warranting some caution. The quick pace of inoculations in the UK may nevertheless have Gov. Bailey express increased optimism over the recovery and trigger a clearer strengthening of the GBP," says Juan Manuel Herrera, a strategist at Scotiabank. "The pound will have to find a more convincing push above 1.3750 in short order as another rejection of the area could trigger a bearish breakout that would interrupt the GBP’s firm bullish trend since early-Nov. Support is 1.3640/60, resistance is Wednesday’s peak of 1.3759."
Ahead of Thursday's BoE meeting, the most significant determinant of GBP/USD direction could be whether or not global stock and commodity markets are able to stabilise, which would itself depend on developments relating to vaccine export restrictions in Europe as well as the mood among investors in Asia where stock markets saw some of the heaviest falls last week.
GBP/USD Forecasts 2021
Period: Full Year 2021
FX for Businesses Guide
Britain's vaccine rollout is, according to official pronouncements, unaffected by a recent European Union rule that threatens to block vaccine exports after Prime Minister Boris Johnson and EU Commission chief Ursula von der Leyen agreed that no measures should affect fulfillment of existing contractual obligations.
But the UK faces increasingly stiff competition from Washington, which has put the U.S. in second place in the vaccination rankings among major economies.
"GBP/USD has again seen a new high not confirmed by the RSI (this is both the daily and weekly charts) and we will allow for the possibility that the market will consolidate further near term. Below 1.3520 would alleviate immediate upside pressure," says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank. "Above 1.3760 lies the 1.3836 February 2016 low. Longer term the 2018 peak at 1.4377 is targeted."
Above: Pound-to-Dollar rate shown at daily intervals alongside U.S. Dollar Index (black).
There's uncertainty over what the U.S. vaccination performance will mean for the Dollar given it could aughur an economic recovery that's comparatively faster than those seen in non-UK European economies, although most analysts favour further Dollar losses, which bodes well for Sterling's outlook.
"The pause in the dollar decline seen during January has not been accompanied – in our view – by a weakening of the key arguments in favour of a medium-term bearish view. The Fed reiteration of its “lower for longer” stance leaves the USD real-rate profile as firmly unsupportive for the currency, and we are inclined to think a resumption of a stable risk rally looks likely," says Chris Turner, head of markets and regional head of research at ING. "The January jobs report will be the highlight of the week and we expect a +100k read, which is slightly above consensus, but unlikely to generate much excitement."
GBP/EUR Forecasts 2021
Period: Full Year 2021
GBP/USD Forecasts 2021
Period: Full Year 2021
The Dollar has been hamstrung by a Federal Reserve pledge to keep interest rates on the floor for years even as the economy recovers and inflation rises, a commitment Chairman Jerome Powell doubled down behind last week when impressing that rate setters are more concerned with still-high levels of unemployment and the economic recovery than they are with inflation, discussions about any eventual tapering of the bank's $120 bn per month quantitative easing program, or any rate rises.
"With nominal rates anchored at the zero lower bound, rising inflation expectations due to global growth optimism have pushed down US real yields and vice versa - they have moved more countercyclically," says Zach Pandl, global co-head of FX strategy at Goldman Sachs. "Most US Dollar exchange rates, and therefore broad Dollar indexes, are negatively correlated with the health of the global economy and thus related market proxies, like equities and commodities. When global growth expectations are rising the broad Dollar tends to fall, and when global growth expectations are falling, such as during a recession, the Dollar tends to rise."
Above: Pound-to-Dollar rate shown at daily intervals alongside S&P 500 futures (black) and EUR/USD (yellow).
The Dollar's Fed handicap potentially limits the extent to which it could benefit from Friday's non-farm payrolls report even if it comes in better than is expected. January's jobs data is due out at 13:30 on Friday and is the highlight of the week for the greenback, with consensus looking for a meagre 55k increase in employment to follow on from December's -140k contraction, although there's unusually high uncertainty over the outcome given the imposition of renewed 'lockdown' in parts of the U.S. in recent months.
"Time-zone analysis shows that after the European investors unwound risk in 2021, the US and Asia investors took over and continued to buy the so-called "high-beta" currencies. Front-end skew and positioning analysis also show continuation signals for broad USD downtrend," says Vadim Iaralov, a quantitative strategist at BofA Global Research. "Among the USD downtrend continuation signals from positioning analysis, GBPUSD is the most favorable."
Meanwhile, GBP/USD benefits from nearby technical supports between 1.3610 and 1.3640, but faces a number of resistance barriers immediately above Sunday's opening level around 1.37. Much is to be determined by this week's BoE decision if Sterling needs to make prompt progress above 1.3760, in order to avoid the more lengthy period of consolidation or even correction flagged by Scotiabank, Commerzbank and others.
"Although GBPUSD holds a bullish “outside day,” strength has been capped as feared at near-term trend resistance from the beginning of the year at 1.3759/62, maintaining the possibility a small bear “wedge” may be forming. Support at 1.3610/05 needs to hold to allay these fears for now with resistance seen at 1.3721/31 initially, above which can see a retest of 1.3759/62," says David Sneddon, head of technical analysis at Credit Suisse. "Beyond here is needed to curtail thoughts of a bear “wedge” and reinforce the existing and large major base in place above 1.3514, with resistance then seen at 1.3804 next, ahead of 1.3997/1.4000."
Above: Pound-to-Dollar rate at weekly intervals with Fibonacci retracements of 2018 fall and EUR/USD (yellow).