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Could this be the month that breaks GBP’s 6-month long winning streak? Traders are split almost perfectly down the middle, with 49.35% of retail traders net-long on the GBP/USD.
If you throw back your mind a few months, it is astonishing that this is even a consideration. In the spring of 2020, all analysts agreed that Britain’s future was bleak. Boris Johnson had announced a nationwide lockdown as Covid-19 infection rates exploded. The economy ground to a halt and the health service was pushed to its limits. Brexit was around the corner and the general consensus among observers was that Britain was poorly prepared; and that the Johnson government’s approach to negotiation was foolish, self-defeating, and potentially illegal.
As the year progressed, the future remained clouded for the UK. Brinksmanship in its negotiations with the EU and a stop-start approach to lockdowns put the GBP on a rollercoaster. The UK suffered the deepest economic recession of all European economies and, while the markets wisely refused to price in the possibility of a no-deal exit, there was a nervousness in the air.
Fast-forward to February and the outlook for the Sterling could not be more different. The UK’s vaccination programme started early and has ramped up at incredible speed. Yes, Brexit is weighing heavily on both exporters and importers, but these hindrances are a drop in the ocean compared to the economic benefits of a rapid and permanent end to lockdown.
With the bulls firmly in charge, many analysts are predicted that the GBP/USD could end the year above the 1.50 mark. But things may not be that simple. If 2020 has taught speculators anything, its that in the current era conditions can change in the blink of an eye and black swans can come in flocks.
In the immediate future, analysts will look to the continued success of the vaccine rollout in the UK; but expect investor enthusiasm to take a hit as the EU and the USA’s own vaccination programmes hit their stride. In mid-March we will also see both the Bank of England and the Federal Reserve make decisions on interest rates. And while we are already seeing the effects of the US stimulus package on the markets, a more powerful driver for the Sterling will be Chancellor Rishi Sunak’s Budget statement on Wednesday 3rd March.
Sunak has been praised for the swift and decisive manner with which he has dealt with the pandemic, but he is still surveying the wreckage of the worst downturn in 300 years. While the damage is not as profound as first feared, and 2021 will be a record-breaking year in terms of growth, the Office for Budget Responsibility (OBR) will advise of a huge hole in the UK’s public finances stretching into the medium-term.
Sunak has already said that this is the moment where he “levels with the people”, signalling that the way forward is going to include higher taxes. Where and how the tax rises land will be watched very closely. He has the unenviable job of convincing business and investors, already battle-scarred from a brutal 2020, that he can deliver exceptional growth, safeguard jobs, and add to the tax burden simultaneously.
It is not a surprise that many Forex brokers in the UK are reporting an increase in short positions on the GBP/USD. A wariness has taken hold as the reality of a post-pandemic Britain comes into focus.
As 2021 continues and the developed economies begin their recovery from the pandemic, will the UK start to feel the effects of Brexit more keenly? Or will it get lost in the post-pandemic boom? And this is before the impact of other global developments are even considered. GBP speculators are split almost evenly for a good reason.
