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GBP-to-USD prediction for January 2020

By David Becker

Positive technicals point to a choppy upward trend in the pound-to-dollar exchange rate

After bottoming in Q3, sterling rebounded finishing 2019 on a high note. The GBP/ USD currency pair began to gain traction as traders started to alter the pound-to-dollar exchange rate forecast ahead of the December general election.

The dollar also started to ease against most major currencies. UK Prime Minister Boris Johnson promised fiscal stimulus, which has also weighed on the future predictions of the pound to the dollar.

There will be pressure on the Bank of England to ease policy which will likely increase unless there is an improvement in economic conditions in the UK. The technicals are supported to a more robust GBP-to-USD prediction for January. The combination of mixed fundamentals and positive technicals point to a choppy upward trend in the pound-to-the-dollar exchange rate in January.

The fundamentals, interest rates and stimulus

UK interest rates edged higher in Q4 but continue to remain near the lowest levels seen since 2016. The US-versus-UK interest rates differential, which is one of the driving forces behind the GBP to USD trend, is printing at the lowest levels seen in three years. The interest rate differential between the UK and US makes up the forward rate and the depressed levels of the forward points make speculating on the GBP-to-USD exchange rate forecast inexpensive. Traders who want to short the pound-to-the-dollar exchange rate do not have to pay a lot in carrying costs.

The prediction of the pound to the dollar will rely on the future UK and US interest rates. US rates are likely to continue higher as the Fed has said that the bar to lower rates will be much higher than they have been in the past. The Bank of England will likely face pressure to ease rates. Additionally, Mark Carney's term as Bank of England Governor is nearing an end. He has expressed interest in leaving for some time but has been coerced into extending his tenure from the end of January until March 16, 2020, when Andrew Bailey takes over as the new Governor.

Pound-to-dollar latest news

The economic data that helps traders with a prediction of the pound to the dollar has been mixed. On the first day of 2020, the UK released manufacturing data for December which edged higher. The UK manufacturing PMI rose to 47.5 from a flash report of 47.4, down from the November reading of 48.9. An index reading of 50, describes the boom/bust level. The manufacturing reading has not been above 50 since April. UK CPI has also remained subdued. On a year-over-year basis UK CPI is hovering near 1.5 per cent. The Bank of England only has one mandate which is to keep CPI in a range near 2 per cent year over year. This is likely to help provide an easing backdrop for the central bank. If the Bank of England adopts an easing bias, as the US Federal Reserve moves to a neutral interest rate bias, the interest rates differential is likely going to favour a lower GBP-to-USD prediction.

Foreign reserves

At the end of every quarter, the international monetary fund reports its official reserves for the prior quarter. The value of reserves for sterling has declined for the Q3. Reserves are reported in US dollars. At the end of the Q3, all the major currencies fell against the greenback, including a 3.2 per cent decline in sterling.

GBP to USD prediction for January using technicals

The pound to the dollar exchange rate is trending higher with support near the 50-day moving average near 1.2980. Resistance on the pound to dollar is seen near the December highs at 1.3515. The long-term trend in the pound to dollar is higher as the 50-day moving average recently crossed above the 200-day moving average. This movement is referred to as the “golden cross” and points to a higher GBP to USD prediction for January.

Momentum is positive as the MACD (moving average convergence divergence) index generated a crossover buy signal. This occurs as the MACD line (the 12-day moving average of the pound-to-dollar exchange rate minus the 26-day moving average) crosses above the MACD signal line (the nine-day moving average of the MACD line). The MACD histogram is moving into the black with a rising trajectory which points to a higher predicted pound to the dollar exchange rate.

GBP to USD prediction for January

While the fundamentals paint a mixed picture, the technicals point to a higher pound-to-the-dollar exchange rate. This is likely going to point to a choppy upward trend in the GBP to USD currency pair. Traders will need to keep an eye on the Bank of England to determine if they are moving towards reducing UK interest rates. Brexit will also play a role in the GBP-to-USD prediction for January. News of negotiations with the European Union will also help drive the trend. Currently, the technicals point to a higher pound-to-the-dollar exchange rate, which should govern the underlying trend in the GBP/USD currency pair.

FURTHER READING: GBP to USD prediction 2020: is the pound going to rally?

FURTHER READING: FTSE 100 forecast for 2020 and beyond

FURTHER READING: Andrew Bailey appointed new governor of Bank of England

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