GBP/USD performed well in 2017, moving from 1.20 in early January to close around the 1.35 mark. This occurred on the back of the pound not only strengthening but the dollar consistently weakening throughout the year. This went hand-in-hand with the US inflation figures, which began the year on the back-foot and did little to regain lost ground. For most of the year, the Fed Chair Janet Yellen implied it was transitionary and that it would eventually pick up. Her view was reversed by November as the Fed looked at a final interest hike for the year. Yellen was seen to be positively dovish towards the dollar.
2018 has already proven to be an exciting year for the currency pair. Throughout January, there has been fresh two-year highs almost each week; with the pair capitalising on December’s strong finish, gaining from 1.35s to 1.43. The rally has been driven by a weak dollar, which has seemingly become more troubled as the weeks pass - sprinkle marginal pound gains into the GBP/USD mix and you see significant movement. However, justifying the sizeable moves and its triggers is difficult. Typically, moves of this magnitude would be backed up with strong economic or political announcements, meaning there’s the possibility for it to fall away. Although technical resistance at 1.40 has been broken, we still feel the fair trading range for the pair lies around 1.38-1.39. While we have seen the pair consolidate between 1.41-1.42, providing the pair remains above key support at 1.40 we see the currency continuing to build. Should the currency drop below 1.40 for any prolonged period of time, we could again see 1.36-37s.
Throughout 2018 we expect movement in the same direction although not quite at the same pace. Brexit will of course play a part in the pound’s position but this can go both ways. We expect to see more clarity as negotiations progress, the road ahead will not necessarily be a smooth one and we expect the pound to take some knocks along the way. But all-in-all we expect to see the pound continue to gain. In addition to this, we continue to be reminded that the pound is still underpinned by the economy. Markets lost sight of this until the latter part of 2017, which was when we saw the pound recover. Provided this remains the case we feel the pound will remain fairly solid.
The dollar, from our perspective has 2 significant and contradicting factors for the year ahead. On one hand, we have a mass repatriation of wealth in line with the new Tax Bill. The last time this happened the dollar gained 13% over the space of 12 months. We now have companies like Amazon, Apple, Facebook and Google, all of which are huge American owned global companies. Apple announced earlier in the year that they would be repatriating hundreds of billions in cash this year. And the other, the American economy is plateauing, with inflation still way off par.
GBP/USD rate predictions
Q1: 1.40 Q2: 1.42 Q3: 1.45 Q4: 1.50