Financial markets have had a difficult time, with the uncertainty of Brexit weighing heavily on trade. This together with the economic downturn, has meant that GBP has endured a modest year. Against the USD, GBP is only marginally higher, coming from 1.3100 at the start of 2020 and bouncing back from a year-low of 1.1400 in March.
Brexit is still making its presence felt, although there is now some cause for optimism. It’s looking increasingly likely that a No Deal scenario has been avoided with a tentative deal waiting for approval before New Year’s Day.
However, this deal isn’t quite the finished article and for many sectors merely sets out intentions and scope rather than being a legally enforceable agreement. It means that negotiators will be kept busy for the coming months, thrashing out the full trade deal and hammering out the detail.
What does all this mean for GBP in 2021, and how will it affect trading? Here’s a look at expert predictions, and what to be aware of when trading.
Moderate Gains Expected
GBP has been suffering from a lack of certainty as the Brexit negotiations hung on by a thread. If there’s one thing the market doesn’t like, it’s instability, and the lack of a trade deal has hit the currency hard.
News of an agreement has boosted GBP and led to more optimistic forecasts moving into 2021. Averting the No Deal exit was viewed as critical by many, and a trade deal – no matter how dubious – is the best news that GBP needed.
With the economy facing a difficult recovery, any bounce from the EU deal will be modest. Nevertheless, experts believe that the first quarter of 2021 should see small but definite GBP gains against a basket of currencies.
Movement Against USD
Although Brexit has given GBP a push upwards, there are plenty of downward pressures too. 2021 will be the year that the economy has to try to recoup its losses, and that could place finances under severe stress.
This means that GBP may need a bit of a helping hand from USD to retain its bullish sentiment, which it’s likely to get. USD has been on a downward trend since March, with only one half-hearted recovery in September. Although there has been a significant drop in the strength of USD in 2020, the general consensus is that it will fall further.
As the year ends, USD is hovering around 90 on the US dollar Index, which, while low, has plenty of downside remaining. In 2008 and 2011 it touched 71 and 73, leaving it lots of capacity to further tumble in 2021.
This weakness compared to the slightly bullish mood for the GBP, means that the latter might move higher than otherwise expected.
In summary, the short-term outlook for GBP looks good, but the recovery is fragile and could easily be derailed if economic plans don’t go as intended.