Interest rate movements are set to determine where the GBP / USD goes

gBP / USD started 2021 under downward pressure. At the start of 2021, interest rate markets forecast negative interest rates for the Bank of England’s official spot rate (bank rate) due to the extreme weakness of the UK economy (see graph ). The British government made the decision to lock down the British economy in early January. The Bank of England subsequently advised banks and building societies to prepare for the “possibility” of negative interest rates.

The British pound then started to strengthen in mid-February as the UK economy picked up momentum. The British pound gained further ground in the first half of 2021 and hit its 2021 high at 1.4250 on June 1, as the prospect of negative interest rates from the BoE dissipated, online with the improvement of the UK economy.

In the second half of 2021, the pound started to weaken. The weakness of the GBP was most noticeable against the strengthening of the dollar and the appreciation of the CNY. As we move into the last quarter of 2021, the pound has moved to a negative annual performance against these two currencies. Part of the depreciation of the pound was reversed following an unexpected interest rate hike by the Bank of England at the December 16 meeting. The BoE raised the discount rate from 0.15% to 0.25%.

The depreciation of the GBP against the USD and CNY in the second half of 2021 reflects more the strength of the USD and CNY currencies, rather than the weakness of the GBP per se. The GBP held onto most of its 2021 gains against the JPY, EUR, AUD and NZD.

It helps to recognize that when the USD started to strengthen against most currencies in mid-2021, the GBP / USD fell less than the AUD / USD and the NZD / USD in the second. half of 2021. The fact that the UK government reduced Covid restrictions earlier than the Australian and New Zealand governments explains the relative strength of the pound sterling.

The GBP also rose against the AUD because the RBA “disappointed the market”, which sought a more hawkish stance from the RBA at its November monetary policy meeting. Low Australian core inflation (2.1%) and a more subdued outlook for wage growth and the Australian economy justified the RBA’s policy.

The GBP also rose against the NZD in the fourth quarter due to a slowing New Zealand economy. The Reserve Bank of New Zealand had previously raised interest rates. However, retail activity, consumer spending and business confidence in New Zealand had started to ease as covid restrictions impacted New Zealand’s economic activity. . After strong GDP growth in the second quarter, New Zealand’s economy contracted 3.7% in the third quarter.

In summary, the most notable feature of the UK economy, and reflected in the performance of the British pound during 2021, has been the fairly drastic change in market prices for the Bank of Canada’s interest rate changes. ‘England. From pricing Bank of England interest rate cuts and negative interest rates in early 2021, the interest rate market has shifted to pricing interest rate hikes in the fourth quarter. 2021, which the Bank of England subsequently delivered.

The outlook for GBP / USD over 2022 is expected to be determined in part by market-set interest rate hikes for both the Bank of England and the US Federal Reserve. As the Bank of England downgraded its forecast for UK real GDP growth for the fourth quarter of 2021 and the first quarter of 2022, it noted that “experience since March 2020 suggests that the waves successive Covid campaigns seem to have had less impact on GDP “. However, unlike the US economy, the UK economy has not yet recovered to its pre-pandemic level in March 2020 (see graph).

The USD into 2022 will be guided by the extent to which the Fed believes it needs to raise interest rates. At present, there appears to be a greater risk that the Fed will raise interest rates more than the Bank of England over 2022. However, there will almost certainly be times when the British Pound appreciates against the Bank of England. the USD. When this strength in the GBP inevitably occurs, it should be borne in mind that the GBP / USD has struggled to spend much time above 1.4200 since the UK decision on Brexit at the mid-2016.

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