Sterling Forecast In 2021

2020 has been a difficult one for Sterling traders, with the uncertainty surrounding Brexit compounded by the economic and human devastation caused by the coronavirus.

Most of the U.K. remains in some stage of lockdown, and while a vaccination program has begun, it will take months before the population has been inoculated against the virus.

GBP/USD started 2020 around 1.3100 and is looking to the end of 2020 less than a handful of points higher after making a v-shaped recovery from a virus low around 1.1400 in mid-March.

The first quarter of 2021 is likely to be more positive for Sterling as the path clears for moderate gains against a range of currencies. 

EU-UK trade talks will still draw headlines as ongoing work by both sides will be needed on any terms of trade. Meanwhile the Covid-19 vaccination program that began in December will raise expectations that by mid-year, the country may be back on its economic feet and no longer in the grip of the virus. 

Sterling should benefit from this more benign background, but gains may not be as large as previously expected, as the full scope of trade's and economic activity becomes clear and confidence returns.

GBP/USD trend in 2020

Photo: TOP1 Markets

Experts Prediction

Bullish Sterling

Some experts believe that GBP/USD Rate "Undervalued" and eyeing 1.40 amid renewed investor interest in sterling.

The Pound-to-Dollar exchange rate is undervalued and likely on course for a multi-year high in the coming months, according to strategists at Commonwealth Bank of Australia (CBA), as investors show renewed interest in Sterling in response to a series of favourable fundamental developments.

Pound Sterling was an outperformer last week and sat around the middle of the major currency rankings for 2021 on Tuesday after Bank of England (BoE) Governor Andrew Bailey's appeared to pour cold water over the previously-popular idea that negative interest rates could've been becoming a likelihood. 

"GBP/USD pushed over 1.36. We see the risk it trades closer to 1.4000 over the next few months because GBP/USD is undervalued," says Joseph Capurso, a strategist at CBA, citing a current account deficit that has recently narrowed to its smallest size since 2012.  

Investors had perceived the odds of a subzero Bank Rate to be rising when the government returned the country and economy to 'lockdown' in January but, and although this third shutdown could last for months yet, developments at the BoE and in relation to vaccinations have held more sway over Sterling.

"Net GBP long positions surged to their highest level since March 2020 on speculation that negative rates may not be used by the BoE, at least imminently. Speculators may also be relieved by the skinny trade deal agreed between the E.U. and the U.K. and by the rapid vaccine roll out in the U.K.," says Jane Foley, a senior F.X. strategist at Rabobank, citing Chicago Futures Trading Commission data covering the week to January 12. 

BoE Governor Bailey's remarks on negative interest rates led British government bond yields to rise even further than U.S. government yields over the last fortnight, providing support to Sterling, although it may be the case that removal of the negative rate threat was simply the catalyst which led investors to buy into a multifaceted Sterling story. 

"We're not surprised to see GBP and AUD showing significant improvements in their positioning profile," says Francesco Pesole, a strategist at ING. "Both currencies rallied significantly towards the end of 2020, as idiosyncratic factors (the Brexit deal for GBP and iron ore rally for AUD) contributed amid a generalised weak-USD environment.

The government's vaccination strategy means the U.K. could be among the first to achieve herd immunity and as soon as this summer, which could enable sustainable steps out of 'lockdown' sooner than elsewhere and could help to support the pound. Sterling could be further supported by the fact that investors' bets in favour of it remain underweight compared to other major currencies as well as historical norms for the speculative trading in British exchange rates. 

Bearish Sterling

Sterling rose 10% against the dollar in the second half of 2020 as speculation on a deal intensified, extending a rebound from its lowest level in over three decades touched in March. Yet since the start of the year, it has fallen more than 1% against the euro, and is among the only major currencies to lose ground against the greenback.

The pound's recent strengthening can be attributed in part to relief among investors that the impact of Brexit has not caused the chaos some feared, as well as a lessening of negative rates expectations, said Neil Jones, head of F.X. sales at Mizuho.

"Going into early 2021, there was a bearish sentiment building into the pound on the Brexit deal, in terms of maybe it had a limited reach, and then secondly an expectation of negative rates and so to some extent the market has been cutting down on sterling shorts because neither of those things have been quite so apparent as they were," he said.

The pound's Brexit deal honeymoon looks well and truly over, with the currency off to the worst start to the year among its Group-of-10 peers.

Allianz Global Investors has taken a short position on sterling against the euro, citing the bare-bones nature of the U.K.'s trade agreement with Brussels. BlueBay Asset Management LLP remains bearish given the economic headwinds, while Mediolanum International Funds says it's too soon to go overweight as the threat of the coronavirus remains.

The pound has danced to the tune of Brexit developments since 2016.

The last-minute Brexit deal swept away investors' worst fears of a messy divorce and put an end to years of political wrangling, leading the pound to jump about 2% into the end of 2020. But rather than pave the way for further gains, the resolution has brought to the foreground a host of concerns that risk undermining sterling.

"With sterling having failed to rally materially on the back of the Brexit deal -- versus the euro -- we are now inclined to see it underperform," said BlueBay's Chief Investment Officer Mark Dowding, who oversees $70 billion for the firm. He offloaded bets on the pound against the euro in December.

In the end of 2020, Prime Minister Boris Johnson sent England into a third lockdown, dealing a fresh blow to an economy already forecast to stutter along well below potential. For the longer term, speculation is growing that Scotland, which voted to remain in the bloc in 2016, could seek to leave the U.K., ushering in a new chapter of political turbulence.

The U.K.'s growth is forecast to be 0.5 percentage points lower every year for the next decade than if Britain had stayed in the bloc, according to Bloomberg Economics. With the lockdown in the face of a more contagious strain of the virus, the country is now headed for an even sharper double-dip recession.