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Key Takeaways
- British pound outperforms most G-10 peers YTD in 2021.
- High vaccination rates and a hawkish central bank fueled demand for GBP in H1.
- FX forecasters predict a stronger GBP/USD over the long-term.
Spot (mid-market) rate = $1.3865 (12:00pm, August 11, 2021)
Summary:
British pound outperforms G-10 peers. In 2021, GBP outperformed most of its G-10 peers amid a broadly strong US dollar environment. Notably, the pound rose to an 18-month high against the euro yesterday.1
High vaccination rates and a hawkish central bank fueled demand for GBP in H1. However, a big increase in UK business closures and a surge in Covid-19 fatalities may stop the BOE from tapering its bond-buying program anytime soon.
FX forecasters predict a stronger GBP/USD. Bloomberg’s survey of FX forecasters shows a bias for a slightly stronger GBP/USD over the remainder of Q3 and beyond.2 We agree over the long-term, but in Q3 the GBP/USD may actually weaken slightly, while remaining within a fairly wide $1.37-1.40 range.
Bloomberg Aug 2021
Several themes are driving the value of the British pound:
Strong dollar environment. In 2020, the dollar weakened broadly against its G-10 peers (GBP rose only 3.1%, in 8th place). Early this year, the dollar’s downtrend unexpectedly stopped, reversed, and headed higher. Since late May, the dollar index has risen 4%, while the pound dropped only 2%, outperforming most other G-10 currencies.3 Traders are focused on potential Fed signals on tapering at the Jackson Hole Economic Policy Symposium on August 26-28.
Surprising rise of Covid-19 deaths. In H1, the UK led most developed countries in vaccination rates. However, recent figures show that Covid-related deaths in England and Wales hit their highest weekly total since late March.4 This most likely reflects the impact of the Delta variant/third wave, which began in June.
Uneven economic fundamentals.
- GDP growth will resume. Q1 GDP contracted by 6.1%, the worst performance amongst G-10 economies. Nevertheless, preliminary Q2 GDP released tomorrow is likely to be strong: expectations are for 4.8% QoQ and 22.1% YoY. 5
- Mixed social mobility data. Google’s recent Mobility report for Britain was mixed: significant positive changes in daily flights and visits to parks/beaches/gardens, but significant declines in use of public transport and workplaces. 6
- Large current account and budget deficits. Both are the worst of the G-10 countries, but traders have already built this into financial market pricing.7 Historically, such deficits have little impact on UK financial markets/GBP.
Bank of England’s (BOE) increasingly hawkish posture. Last week, the BOE kept rates steady and its $1.25 trillion bond-buying program intact. However, some policymakers broke ranks by suggesting tighter monetary policy sooner rather than later.8 The BOE is expected to be among the first central banks to begin the process of unwinding its extraordinary stimulus policies, in stark contrast to the ECB.
Currency speculators are positioned “short” GBP. CFTC weekly currency position reports show that large currency speculators recently turned net short GBP for the first time this year - creating fertile ground for GBP gains.9
TECHNICALS. We predict that the GBP/USD will be soft over the remainder of Q3, but trade within a wide $1.37- 1.40 range. It is expected to resume its secular uptrend in Q4 / early 2022.
If you’d like to discuss your specific situation or for more analysis on FX markets or information regarding SVB's FX services, contact your SVB FX Advisor or the SVB FX Advisory Team at fxadvisors@svb.com.
