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Pound price forecast 25 March 2021

2021-03-25

2021-03-25

Pound is retreating but not giving up. Forecast as of 25.03.2021Dmitri Demidenko

It takes time to adapt to life in new conditions. Leaving the comfort zone is not painless for anyone. The pound is no exception. Brexit and the pandemic have disrupted the old way of life, but summer is approaching, and everything will change for the better. Let us discuss the Forex outlook and make up a trading plan for [GBPUSD][1] and [EURGBP][2].

Monthly pound fundamental forecast

The conclusion of a Brexit agreement at the last moment was like a miracle, but any magic ends sooner or later. The UK and the EU have agreed on duty-free trade in goods, but the situation with services is not so smooth. The European Union is preventing the export of vaccines produced on its territory to the UK and is ready to sue London for arranging checks at the border of Northern Ireland and Ireland. The volume of foreign trade between yesterday’s partners has sharply decreased. The fact that political risks have reduced but not disappeared contributes to the pound weakening against major world currencies.

Indeed, in January, UK exports to the EU fell by 41%, imports - by 29%. As a rule, the initial reaction to the breakup of old relations is stronger than in the long term when countries will adapt to new conditions of cooperation.

UK-EU foreign trade dynamics

Source: Nordea Markets.

The same applies to inflation, which slowed to 0.4% YoY in February and seriously frightened sterling buyers. Since the Bank of England abandoned the idea of ​​introducing negative rates because, according to its forecasts, consumer prices will accelerate. However, if everything does not go according to plan, will the BoE return to the idea of ​​dropping the interest rate below zero? The inflation slowdown is more of a temporary measure. Based on the dynamics of energy prices and Markit commodity prices, the UK CPI will soon accelerate and is likely to exceed the central bank’s target of 2%.

Dynamics of commodity prices and inflation in the UK

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Source: Nordea Markets.

Selling [GBPUSD][1], investors turn a blind eye to the fastest growth of UK PMI data since August, more robust labor market statistics than Bloomberg experts predicted, and hawkish comments from the Bank of England representatives. According to chief economist Andy Haldane, a GDP boost should be expected after the lifting of restrictions. Over the past year, British households have saved about £150 billion, which will soon pour into the economy.

In my opinion, the pound’s position looks no worse than those of the US dollar. Both the Fed and the BoE view the rally in bond yields as a reflection of national economies’ strength. In terms of vaccination rate, the UK is ahead of the US. Indeed, due to massive fiscal stimulus, the US GDP will return to pre-pandemic levels faster than its British counterpart. However, other exporting countries will benefit from the growth of US imports.

World vaccination dynamics

Source: Nordea Markets.

The sterling weakening against the euro looks even more surprising.

[EURGBP][2] and [GBPUSD][1] trading plan for a month

In my opinion, the current pound sell-off is temporary. Enter [EURGBP][2] sales on growth with targets at 0.83-0.84. As for the [GBPUSD][1], I will look for buying opportunities in the zone 1.358-1.363, or enter long-term long trades if the pair returns above level 1.386.

Price chart of GBPUSD in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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  1. my.liteforex.com/trading/chart?symbol=GBPUSD&returnUrl=true
  2. my.liteforex.com/trading/chart?symbol=EURGBP&returnUrl=true