GBP forecast: Will the sterling performance continue?
The British pound forecast hinges upon the battle with omicron, EU trade and next steps in UK monetary policy
Two years after the British pound forecast was dominated by Brexit, questions remain about the UK’s new relationship with the European Union.
The withdrawal from the EU became effective on 1 February 2020, just over a month before the pandemic was declared.
Now it’s approaching six years since Leave won the controversial 2016 referendum. The related EU-UK Trade and Cooperation Agreement is not yet a year old. Given how London and Brussels were equally preoccupied with responding to the coronavirus pandemic, some were sceptical over whether a deal would be reached at all. But a lot of the work could be undone if talks over the movement of goods into Northern Ireland fail.
The GBP forecast suffered initially at the start of 2021, when UK exports to the EU fell 45% and imports dropped 33%. But Department for International Trade officials are now boasting what they call a “five-star year” for 2022. Diversification is the buzzword. It will be a year featuring trade talks with India, Mexico and Canada, and the start of deals with Australia and New Zealand. UK trade officials are beaming about the £760bn worth of trade deals with 70 countries, plus the EU.
Alas, Covid-19 remains a hot-button topic when it comes to the British pound forecast for 2022 and beyond. Forex traders have a laser-like focus on how major economies are reacting to the crisis and its ripple effects, and the likelihood that countries will be able to return to normality in the near future. Recent events exposed new rifts between them.
GBP projections have been cheered by the UK’s ambitious, and impressive, vaccine rollout. The government spread its bets and placed orders for jabs with several biotech companies as they raced to produce a vaccine. London ordered millions upon millions of jabs – far more than the country needed at the time – acknowledging that some firms may end up being unsuccessful in their quest.
This is where the pound forecast comes in. Figures from Our World In Data suggest that the UK had fully vaccinated almost 70% of people through 9 January 2022. But the World Health Organisation forecast half of Europe would be infected in six-to-eight weeks in a west-to-east omicron tidal wave, after 7 million infections were recorded in the first week of 2022. It spells worker shortages and more supply chain delay nightmares.
Before and after Christmas 2021, there were signs of political upheaval at No. 10 Downing Street. Embarrassing evidence came to light of Prime Minister Boris Johnson and staff partying during earlier lockdowns. That prompted calls from inside and outside the governing Conservatives for Johnson to resign. BoJo replied with an ambitious ramp-up for booster shots and no new nationwide lockdown, while his Minister of Health, Sajid Javid, spoke about plans to move the UK to aggressively avoid lockdowns while moving toward an endemic stage. A delicate balance that some would call a gamble.
Will the pound go up or down?
CIBC Capital Markets left nothing ambiguous in the headline of its 2022 forecast: “GBP to weaken as markets expecting too much from BoE.”
Analyst Jeremy Stretch said: “A moderating growth backdrop, UK/EU trade frictions, and a less aggressive UK rate cycle than that currently priced suggests sterling weakness in 2022.”
He expects a 2 cent drop, from 1.31 in the first quarter to 1.29 in the second quarter versus the US dollar.
Key indicators show that UK gross domestic product is up 6.6% for the last quarter of 2021, year-on-year, but so was the consumer price index at 5.1%. The central bank rate remained at 0.25%.
According to Stretch:
“While the Bank has clearly underlined its determination to adhere to its CPI mandate, we would not expect a material degree of 2022 policy tightening. Moderating growth, and a topping out in energy prices, should limit the inflation upside, and preclude the BoE from being pressed to aggressively tighten in the year ahead. The combination of a moderating growth backdrop, ongoing UK/EU trade frictions, and a less aggressive UK rate cycle than that currently discounted, underlines scope for Sterling headwinds to persist.”
Citibank Wealth Management FX snapshot says the bottom line for the first quarter “may still look dicey for sterling with support seen around 1.31 to 1.32”. Better days could be ahead once Brexit and omicron tensions ease.
Citibank also said that the near-term picture for GBP/USD looks more constructive for two reasons:
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“(1) As the recent low is effectively at the bottom of the down channel in place since June; and (2) there is a clear positive momentum divergence and daily momentum has now turned higher.”
It said the GBP forecast is neutral versus USD, but bearish against the euro, Swiss franc and Japanese yen.
For the next six to 12 months, Citibank forecasts a pound worth 1.29 against the USD, but 1.32 in the longer term.
GBP projections: How is the rest of 2021 looking?
There’s a lot of uncertainty surrounding British pound predictions going forwards, not least is the number of unknowns that the world is facing. Even if the UK starts to reopen fairly soon, there are real risks that a global economic downturn could linger for a while, with some sectors struggling to return to normal for years to come. There’s a possibility that demand for British imports could end up taking a hit, and already, there have been reports that Brexit has dramatically increased levels of paperwork with the EU – affecting trade.
Nonetheless, there’s no shortage of bullish pound forecasts around. Westpac says the UK’s outlook is far more upbeat than Europe’s, adding:
“…the UK does not look as vulnerable as some might think.”
Despite the uncertainty surrounding British pound predictions, ING has also taken a bullish stance. But it comes with reservations.
Unlike the other two above, ING believes the UK Pound forecast could hit 1.37 in the first quarter, before declining to 1.36 and 1.34 in successive quarters.
ING fears that the Bank of England is set to tighten monetary policy at the wrong moment. A case of history repeating, like the ill-timed rate hike in July 2008 on the cusp of the global financial crisis.
“The difference is that there are no clear signals of a UK recession in 2022. Our economist sees a reasonably healthy UK growth profile next year, initially running at 1% quarter-over-quarter.”
The pound still carries what ING calls “Brexit baggage”, due to the rift with Brussels and the risk of the EU-UK Trade and Cooperation Agreement falling apart.
“Our team’s take on this is a reminder that this agreement is barely better than a No Deal Brexit, such that its failure would not trigger the kind of GBP volatility witnessed in 2019.”
Thirdly, ING believes the GBP can keep the pace against the USD.
“In a year when the external environment could become tougher (higher US rates, later in the economic cycle), the UK does not look as vulnerable as some might think.”