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GBP/USD Forecast: Pound to US Dollar (GBP/USD) Exchange Rate Slips as UK Data Fails to Bolster UK Outlook

March 12, 2021 - Written by Frank Davies

Despite some stronger than expected UK data today, the British Pound to US Dollar (GBP/USD) exchange rate slipped from its best levels all week. The US Dollar has also been recovering slightly from its mid-week slump, overall ending a mixed week which saw strong performance from both the Pound and US Dollar. Looking ahead, key US data and policy decisions from both the Federal Reserve and Bank of England (BoE) may drive the pair next week.

Since opening this week at the level of 1.3833, GBP/USD has been climbing. It quickly recovered from last week’s monthly low of 1.3795 and recovered all of last week’s losses too. Yesterday, GBP/USD touched on a weekly high of 1.4003.

However GBP/USD has been unable to hold above the key 1.40 level again just yet. At the time of writing on Friday morning, GBP/USD is trending in the region of 1.3941 - around the previous week’s opening levels.

Pound (GBP) Exchange Rates Weighed by Production and Trade Worries despite Strong UK Growth

Friday’s European session saw the publication of a slew of UK data from January. The data painted a more detailed picture of how Britain’s economy performed as is headed into its third national lockdown, as well as its first month operating outside of EU rules.

Britain’s January growth rate actually beat expectations. UK growth only worsened to –1.7% in the three month print, rather than the expected –2.5%. The yearly figure was a slightly better than forecast but still concerning –9.2%.

However, despite these stronger growth stats, some aspects of Britain’s economy such as production and trade were hit worse than expected in January.

The month’s manufacturing and industrial production results both fell short of expectations. UK trade data was mixed with the trade deficit softening, but analysts were concerned by a sharper than expected slump in UK-EU trade.

According to Danni Hewson, Financial Analyst at AJ Bell:

‘Some of this decline can be put down to lockdown, stockpiling and teething troubles. But it’s clear that the Brexit transition has been far from smooth and markets will be paying close attention to whether current frictions mean long-term changes.’

US Dollar (USD) Exchange Rates Rebound after Sharp Mid-Week Slump

The US Dollar slumped in the middle of the week, as it recoiled from a surge seen last week. Investors sold the US Dollar from its best levels as weaker than expected US price pressures dampened speculation for any hawkish moves from the Federal Reserve.

However, the US Dollar is steadying before markets close for the week after touching lows yesterday. A rise in US bond yields helped the US Dollar to climb back slightly from its plunge.

This was largely a market calming movement as investors took profit from the week’s movements and positions steadied.

Overall, the global market remains optimistic and in a risk-on mood. This is keeping the US Dollar’s appeal limited for now, as it is a safe haven currency which is more appealing in times of global market uncertainty.

Still, some analysts note that the US Dollar may not be in the bearish state it was in for much of the past year. According to Ray Attrill, Head of Forex Strategy at National Australia Bank (NAB):

‘it still looks a bit premature to call a resumption of the 2020 downtrend with any degree of conviction.’

GBP/USD Exchange Rate Forecast: Bank of England (BoE) and Federal Reserve Next Week

The past week was rather mixed for the Pound to US Dollar exchange rate, with the pair being driven largely by US Dollar strength and coronavirus pandemic developments.

Movement could be much more driven by domestic news next week however. Both the Bank of England (BoE) and Federal Reserve will hold March policy decisions which could influence GBP/USD movement if there are any surprise shifts from these central banks.

The Fed will announce its decision on Wednesday. Previously speculated to possibly go more hawkish, the Fed could knock the US Dollar outlook lower if it takes a more dovish stance on the US economy or inflation.

Similar could be said for the Bank of England (BoE), which meets on Thursday. If the BoE is more optimistic about Britain’s recovery potential than expected, Sterling could see another jump in demand, but a more cautious or dovish BoE could weigh on the Pound’s recent strength.

Key data will also be published in the coming week. US retail sales stats on Tuesday could be highly influential if it surprises investors.

Of course, developments in the UK and US coronavirus pandemic situations will also remain key drivers of the Pound to US Dollar (GBP/USD) exchange rate as well.
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