Short-term forecasts for the British pound have been quite optimistic lately, but not the long-term ones. Many analysts say there's a bleak future for the pound, projecting its decline in the medium and long term.
According to currency analysts at Bank of America (BoFA), sterling will strengthen this year amid the global economic recovery. However, Brexit-related issues are expected to steal the limelight. Add to this the measures taken to limit the impact of the COVID-19 pandemic, and you will see why the pound is expected to have a rough time.
Brexit can exert significant drag on the pound, Kamal Sharma, a currency analyst at BofA, said. In 2022, the UK economy will return to relatively stable growth after the COVID-19 pandemic and a series of lockdowns, but the UK's national currency will continue to be under pressure.
According to analysts at BoFA, next year will reveal the fallout from Britain's exit from the European Union. The UK will face the consequences which will substantially weaken the pound.
The currency strategists do not rule out the negative impact of Brexit on the UK economic growth. It is forecast to contract by 5-7.5 percent in the long term. However, sterling is seen to be on a roll in the first quarter of 2022, reaching its peak, Kamal Sharma, said. "Much of the good news on UK growth outperformance is now in the price", he added.
In 2021, the Bank of England did not introduce negative rates. However, the situation might change in 2022.
Markets' eyes are on the Bank of England's meeting in May as it could well be the time the MPC starts a gradual tapering of asset purchases.
HSBC expects the BoE might announce a reduced purchase pace for its quantitative easing program, while raising its growth forecasts and nudging down its near-term inflation forecast.
Meanwhile, according to Capital Economics, in case of the QE tapering, the yeild on 10-year British government bonds will rise sharply. At the same time, the UK central bank can change the course and resume purchases asset if necessary.
Currently, the pound has to withstand a number of unfavorable factors. The British currency was not supported by strong data on retail sales and business activity in the country. Sterling failed to gain momentum, even though the economic statistics was favorable.
In March, the UK consumer spending increased by 5.4%, far exceeding economists' forecasts. In April, the PMI for the UK manufacturing and services sectors exceeded 60, above last year figures.
However, the strong reports did not lead to a rally in the British currency. On Tuesday, April 27, the GBP /USD pair was trading near 1.3881 after touching the level of 1.3895.
According to UBS Global Wealth Management, 2022 may become a turning point for the pound as it may strengthen against the US dollar considerably owing to a rapid recovery of the global economy and investors turning to risk assets. By March 2022, GBP/USD is likely to reach 1.5100, experts at UBS Global Wealth Management say.
On April 26, GBP/USD gained 0.02% to 1.3878. The pivot point was located at the 21-day DMA. Bullish sentiment is getting stronger in the market. The level of 1.4017 is seen as resistance. This is also the highest level as of March 4, 2021.
On Tuesday, April 27, bearish sentiment may increase. The level of 1.3904 is seen as strong resistance. If the price breaks the 1.3904 barrier, the bearish trend will begin.
The majority of market participants believe in the strengthening of the pound given the upwardly revised economic outlook for the British economy. Last week, the number of net long positions decreased. According to Francesco Pesole, a FX strategist at ING, the pound remains the most overbought currency among the G10. In the short term, the number of net long positions is likely to remain at the same level amid optimism about the economic recovery in the UK.
Summing up, the year 2021 will be a good one for the pound despite lockdowns and the slightly shattered economy. Next year, the consequences of both Brexit and the pandemic are likely to weigh on the pound. At the same time, analysts expect the pound to stabilize.