The British pound is performing well compared to the US dollar, and it has been the trend in recent months. This outcome comes to light after the United Kingdom negotiated a Brexit deal with the European Union and started distributing the COVID-19 vaccination, thus raising expectations of returning to normal activities.
On January 25, the UK pound was trading at 1.37 against the US dollar. It is the highest recorded number since April 2018. But how will the UK pound perform in 2021?
What Drives the UK Pound’s Value?
In the past four years, the main driver of the UK pound has been developments in Brexit with the EU, which impacts the UK economy that is already anticipated years ago. As with the other currencies, the UK pound is fundamentally driven by GDP or gross domestic product, employment, inflation, industrial production, and interest rates.
All of these factors are affected by the Brexit deal.
A new and more contagious strain of the COVID-19 virus was identified in the United Kingdom in December 2020. This resulted in an increase in the number of infections and another round of lockdowns imposed by the government.
UK Pound Status in 2021
The UK pound has been undervalued in the past few years because of the uncertainty surrounding the Brexit deal’s ramifications has limited upside, and it has affected the trend of GBP against other currencies. Pound Sterling started 2020 at 1.308 against the US dollar. Then in March 2020, it dropped to 1.163 when the selloff across the financial markets had started a flight to safe-haven assets such as the US dollar.
The UK pound had bounced back to 1.335 by August 2020 as the growth in COVID-19 cases slowed over the summer, and there were hopes of a Brexit deal before the December 31 deadline increased. The UK pound dropped back to 1.275 in September 2020 as coronavirus cases began rising again and Brexit negotiations took effect.
The UK pound ended 2020 at 1.367 and has started 2021 in a 1.352-1.373 range.
Citibank analysts noted, “In terms of drivers for GBP, resilience is being seen thanks to the successful vaccination program in the UK. Faster roll-out suggests a quicker reopening of the economy, leading to a shallower trough for GDP.”
UK Pound Forecast 2021
The technical indicators suggested the market could consolidate in the short term. According to Commerzbank, the relative strength index or RSI has yet to confirm the break above the 1.37 level against the US dollar.
Analysts explained: “It is possible that this was a false break, but for now, we regard it merely as premature, although we also note that the RSI did not confirm the break higher and suspect that the market will consolidate further near term. The recent close above 1.3712 on a daily chart closing basis pushes the 1.3836 February 2016 low to the fore.”
“Longer term, the 2018 peak at 1.4377 is being targeted. Currently, while dips hold over 1.3520, the market remains bid,” Commerzbank said in its GBP forecast 2021.