04.03.202115:28 Forex Analysis & Reviews: Pound remains intriguing: where will the pendulum swing - to 1.3900 or 1.5000?

Long-term review

Exchange Rates 04.03.2021 analysis

An interesting time is coming for the pound sterling: the vector of its movement can go either towards the decline or return to growth. This is facilitated by the adoption of a new stimulus package worth £65 billion ($90.7 billion).

According to analysts, the new package of fiscal measures proposed by the Chancellor of the Exchequer Rishi Sunak will help to revive the severely sagging national economy. Sunak said that this program is unprecedented in the history of business, offering British entrepreneurs "the biggest business tax cut in modern history." The launch of the £25 billion "super deduction" program will allow British businesses to reduce tax payments by 25 pence from each pound, as per Sunak's report.

On Thursday, March 4, the pound outperformed the US dollar during the morning trading. However, afterward, the GBP/USD pair has been declining. The tandem sank 0.15% to 1.3931. In the afternoon, the GBP/USD pair was trading near 1.3944–1.3945, regaining some of the lost positions.

Exchange Rates 04.03.2021 analysis

The pressure on the sterling is due to disappointing macroeconomic data. For example, in February 2021, the Markit UK services PMI fell from 49.7 to 49.5 points. In this situation, many experts recommended selling the sterling, which increased the negative impact on the GBP.

Economists are alarmed by the official statement of the British government about the growth of the debt burden of the public sector to £2.1 trillion. According to chancellor Sunak, from April 2023, it is expected to increase the corporate income tax to 25% from the previous 19%. At the same time, the British authorities will suspend the income tax until 2026.

According to analysts, the weak statistics from the UK, along with the strengthening of the dollar, are a time bomb for the GBP/USD pair. Further strengthening of the greenback in tandem will lead to a decline in the pound, experts say.

Strategists at Commerzbank expressed concerns about a possible fall in the GBP. The bank believes that the imbalance in public finances contributes to the weakening of the sterling. If the UK authorities resolve this issue, the prospects for the pound will be high. However, Commerzbank emphasized that in the event of large-scale cash injections into the British economy, the national currency will sink.

Meanwhile, currency strategists at ING bank adhere to the opposite point of view. Earlier, the department believed that the plans of the British authorities on spending for the 2021-2022 fiscal year would support the pound. The bank's bullish forecasts are built on these expectations, which allow the GBP/USD pair to rise to 1.5000 and higher by the end of this year.

The economic losses in the UK caused by the COVID-19 pandemic are pushing back the economic recovery to mid-2022. According to Sunak, a positive factor for the country is the accelerated rate of mass vaccinations. The chancellor is confident that the negative impact of COVID-19 on the British economy will be felt for several years.

The current forecasts of experts confirm this point of view. The Office for Budget Responsibility (OBR) estimates that UK GDP will be 3% lower than expected in 2026. The reason for this is the COVID-19 pandemic. According to current OBR estimates, the UK economy will grow by 4% in 2021, by 7.3% in 2022, and by 1.7% in 2023. In the next two years, in 2024 and 2025, economic growth is expected to be 1.6% and 1.7%, respectively.

Larisa Kolesnikova,
Analytical expert
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