GBP/USD Forecast: Pound to US Dollar Exchange Rate Slides Back from Month Best as UK Inflation Misses the Mark

April 21, 2021 - Written by David Woodsmith

STORY LINK GBP/USD Forecast: Pound to US Dollar Exchange Rate Slides Back from Month Best as UK Inflation Misses the Mark

Broad US Dollar weakness has persisted this week, causing the British Pound to US Dollar (GBP/USD) exchange rate to hit its best levels in a month. The pair is struggling to hold those highs however, amid a lack of fresh upside support for Sterling. With both the Pound and US Dollar running out of steam lately, volatility may be ahead unless upcoming data boosts market demand for either of these weakening currencies.

Last week saw GBP/USD open at the level of 1.3706, not far above the pair’s lowest levels all month. However, as the US Dollar continued to be sold GBP/USD saw a notable recovery and closed last week at the level of 1.3838.

This week so far has seen even bigger gains from the pair. GBP/USD surged over a cent and a half earlier in the week and touched on a monthly best level of 1.4007 yesterday.

For now, GBP/USD is pulling back from those highs and trends in the region of 1.3938 again. Still, some analysts believe GBP/USD could continue to test levels above 1.40 in the coming weeks.

Pound Sterling (GBP) Exchange Rates Fail to Find Boost in Latest Inflation Report

Sterling has been benefitting from losses in the US Dollar in recent weeks, but domestic UK news has not been enough to keep markets overall bullish on the British currency.

The Pound is optimistic overall, but much of that optimism has already been priced into the Pound. As a result, investors are hesitant to keep buying into the Pound without fresh upside support.

This morning saw the publication of Britain’s March inflation rate results. UK inflation met expectations of rising to 0.3% in its monthly print, but the yearly print fell slightly short of 0.8% expectations with a figure of 0.7%.

The slightly weaker than expected yearly inflation rate weighed slightly on the Pound. Analysts believe inflation will keep rising over the coming year, with some even speculating that inflation could rise to the Bank of England’s (BoE) target rate of 2.0%.

According to James Smith, Developed Markets Economist at ING:

‘From next month, we’ll likely see the rate of CPI more-or-less double. Partly this reflects the slump in energy prices this time last year, but more recently we’ve also had a sharp 9% rise in the household energy cap.

These factors, combined with the ongoing cost rises associated with global shipping and Brexit, are likely to push headline inflation above 2% later in the year.’

Other analysts however, argue that today’s inflation rate doesn’t really point to a surge in inflation. This could mean it could be quite some time before inflation rises enough to cause a reaction in the BoE.

US Dollar (USD) Exchange Rates Recover Slightly but Weakness Persists

The US Dollar’s broad weakness has been one of the biggest factors in global forex trade in recent weeks. This has seen it fall significantly against many major rivals, including the Pound and Euro (EUR).

However, demand for the US Dollar has steadied a little today. It has been able to claw back some ground against the slightly weaker Pound, as market sentiment calms slightly.

Rises in coronavirus cases in many parts of Asia have been weighing on risk-sentiment, causing some investors to look away from riskier currencies and towards safe havens.

While this has been benefitting safe US Dollar rivals, the US Dollar is also benefitting from safe haven demand and is strengthening slightly today.

However according to Thu Lan Nguyen, Strategist at Commerzbank, strong US data could also support US Dollar strength. This means the US Dollar selloff could face other obstacles. She said:

‘So for now, US Dollar bears should make sure that they don’t get excited too soon,’

GBP/USD Exchange Rate Forecast: Currencies May Become Volatile without Fresh Support

Both the Pound and US Dollar outlooks could continue to weaken in the coming sessions, unless surprising economic data causes a shift in currency movement.

There are still key UK ecostats due for publication in the coming sessions. Towards the end of the week, UK retail sales results will be published by the Confederation of British Industry (CBI) and Office for National Statistics (ONS).

UK PMI projections for April will also be published by Markit on Friday. These will give investors a better idea of how Britain’s economy is weathering the coronavirus pandemic this month.

Markit will also publish US PMI projections on Friday, which will be one of the only influential US ecostats this week.

Any other developments in US economic sentiment, as well as potential UK or US coronavirus developments, will of course be closely watched by Pound to US Dollar (GBP/USD) exchange rate investors.

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TAGS: Pound Dollar Forecasts