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At the beginning of 2023, analysts changed their forecasts about the long-term future of the US dollar against the other major currencies. But the pound sterling is the latest to join the party. Let’s try to figure out why the GBP faces such pressure and what’s going on with the USD.
The chart below shows the GBP/USD currency pair movements in the last 12 months. We can see pretty familiar things here. The US dollar grew time by time, due to the Fed interest rate hikes and enhancing the attractiveness for foreign investors. Then the Federal Reserve policy became less aggressive therefore, other currencies (including the pound) came closer to the USD.
Experts believe that the dollar will show less impressive results than was expected several months ago. The first reason is the projected Fed policy. It is believed that the key rate won’t be raised significantly. Moreover, the Federal Reserve is likely to start the decreasing cycle later in 2023. To monitor such significant events as the Fed meeting, you can use the economic calendar – it helps you keep track of important economic events.
The warm winter in Europe weakened the pressure on the euro – another factor making the USD less attractive.
The final negative factor for the dollar is the China factor – the easing of Covid-19 restrictions. It boosts the Chinese economy and manufacturing, improves the situation with supply chain disruptions, becomes the growth driver for the local market and pushes investors to pay attention to emerging markets. In other words, people shift money from the dollar safe-haven to the euro, emerging markets currencies and other major currencies.
The British pound should be on this list, too, but it’s not. There are too many domestic problems and economic challenges in Great Britain. The economy is in the recession stage, the economic outlook and unemployment rate are getting worse; according to the Bank of England’s reports, energy costs are still high.
In addition, the political situation remains uncertain. Britain started 2022 with Boris Johnson as a prime minister, then Liz Truss succeeded him, and now there’s Rishi Sunak in charge. Plus, Jeremy Hunt became the new Chancellor. When there are that many substantial changes in such a short period of time, investors can’t be sure that the new officials will be able to handle new challenges.
So, the negative forecasts for the USD and the negative forecasts for the GBP give us an opportunity to assume that the ratio won’t have changed significantly by the end of 2023. In any case, before you make any trade, you should analyze the market situation and then decide what to do.
Disclaimer: This article is not intended to be a recommendation. The author is not responsible for any resulting actions of the company during your trading/investing experience.
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