Foreign exchange rate forecast: GBP against major currencies

Pound Sterling (GBP) exchange rates came under pressure at the start of the week amid signs that unresolved Brexit tensions were surfacing. Foreign exchange (FX) market also appeared to be opting for a more cautious stance ahead of UK gross domestic product (GDP) figures for Q4 2020.

Vaccine euphoria gave the British pound (GBP) a boost in midweek trade, which saw GBP exchange rates rally to fresh highs against risk-off counterparts such as the US dollar (USD) and euro (EUR). Still, gains proved fleeting amid growing concerns over new variants.

Pound Sterling (GBP) also had a relatively muted reaction to UK growth data on Friday, despite figures coming in firmly above consensus expectations. According to the Office for National Statistics (ONS), UK GDP grew by 1% in the final three months of 2020, marking an annualised contraction of 6.5% – beating forecasts of -8.1%.

Post-Brexit trade headwinds continue to threaten upside in pound Sterling (GBP) exchange rates in the week ahead. However, GBP could extend advances if the UK achieves its target to vaccinate 15 million next week and overall risk appetite improves.

US dollar (USD) exchange rates

Improved risk sentiment and growing expectations for the Biden administration to pass a USD 1.9TN stimulus package for the US economy weighed on the greenback at the start of the week.

However, the US dollar (USD) regained some traction on Friday as investors paused to take a breather from the risk rally complex. The US Dollar Index (DXY) jumped up to 90.74 earlier during the session and continues to trade higher at 90.55.

But the continuation of the US dollar’s (USD) downtrend appears to be the most likely scenario as riskier assets such as the British pound (GBP), Australian dollar (AUD) and Canadian dollar (CAD) are edging higher ahead of the weekend.

Demand for the US dollar (USD) faded amid signs that covid vaccine rollouts in the EU, Australia and other countries are accelerating, buoying hopes for a strong global economic rebound in 2021.

The Federal Reserve’s (Fed) “lower for longer” stance is also expected to fuel risk appetite in the coming week.

Euro (EUR) exchange rates

Concerns over Eurozone’s sluggish vaccine rollout, growing Euroscepticism and disappointing EU economic data has left the euro (EUR) unappealing for much of this trading week.

Inflationary pressure is weakening across the bloc and the EU’s largest economy, Germany, extended its national lockdown until March 7th amid fears over new COVID-19 mutations.

Despite the euro’s (EUR) recent underperformance, the single currency’s fundamentals remain relatively optimistic.

While the EU is the laggard in the vaccine race, recent reports reveal  a fresh batch of vaccines have been delivered to the bloc could drive the euro (EUR) higher next week. Pharmaceutical giant, AstraZeneca, has also doubled its output efforts in a bid to deliver an additional 9 million doses of its vaccine to the Eurozone in Q1 2021.

With vaccine rollouts primarily seen as the answer to exiting lockdowns across the bloc, any signals pointing towards an acceleration in the EU’s vaccination programme could offer the euro (EUR) a significant boost next week.

Japanese yen (JPY) exchange rates

The Japanese yen (JPY) rallied against an abundance of major currencies at the start of the week amid the more cautious mood in FX markets, but with sentiment repaired, gains have been short-lived.

The Japanese yen (JPY) is trading lower against all its G10 rivals ahead of the weekend, undermined by an improvement in risk appetite.

While fears over emerging coronavirus strains could trigger some flight-to-safety behaviour in the coming week, JPY is at risk of extending declines amid expectations that vaccine progress will support global economic recovery.

Australian dollar (AUD) exchange rates

The Australian dollar (AUD) continues to be driven by broader moves in global stock markets, rising when stock exchanges appreciate and reversing when equities fall.

Given that the market rally is expected to continue over the coming weeks due to vaccine optimism and declining COVID-19 cases, the “Aussie” dollar could advance across the board.

However, it seems domestic fundamentals will also determine the direction of AUD. Despite the improved mood in currency markets, the Australian dollar (AUD) has failed to register any upside against the British pound (GBP), which is being supported by hopes that the UK’s rapid vaccine rollout will result in the UK economy unlocking ahead of peers.

That being said, the stark difference between the UK and Australia’s ability to contain COVID-19 could ensure AUD remains on a trend of appreciation.

A recent rally in iron ore prices could also support the Australian dollar (AUD), providing that demand for the country’s primary export remains strong into next week.

Canadian dollar (CAD) exchange rates

Rising oil prices, renewed US dollar (USD) weakness and expectations for a US stimulus package have fuelled the Canadian dollar‘s appreciation (CAD) this week.

However, the “Loonie” slipped ahead of the weekend after the rally in oil prices ran out of steam. Investors also adopted a more cautious stance following increased reports warning new Coronavirus mutant strains are resistant to  COVID vaccines.

While risk sentiment has improved ahead of the weekend, the Canadian dollar (CAD) outperformance will likely depend more on positive developments in oil and commodity markets, rather than vaccine optimism.

Any indication that US President Joe Biden will unleash the colossal USD 1.9TN US stimulus package could also increase the Canadian dollar’s appeal (CAD) as the “Loonie” is particularly sensitive to developments around US spending plans.

New Zealand dollar (NZD) exchange rates

The New Zealand dollar (NZD) has been one of the best-performing currencies of the past ten months, and the “Kiwi” is expected to extend its gains in the near-term due to New Zealand’s successful handling of COVID-19.

Aside from ongoing publications of positive New Zealand economic data, rising commodity prices and Chinese growth output have also aided the currency higher this week.

The New Zealand dollar (NZD) pared gains during overnight trade on Friday due to renewed US dollar (USD) strength but reversed its fortunes following confirmation that New Zealand will receive vaccine doses a month ahead of schedule.

Despite effectively stamping out the coronavirus from its borders, New Zealand has been criticised for its slow procurement of vaccines in recent weeks, which had triggered some NZD weakness.

However, with the country’s vaccination programme expected to start on February 20th, this combined with broader risk sentiment could trigger bullish upside in NZD exchange rates.

Other major currencies in foreign exchange markets

The South African rand (ZAR) storms higher following better-than-expected economic data and confirmation that South African business confidence extended its recovery in January.

According to the SACCI Business Confidence Index, sentiment rose by 0.2% month-on-month in January. South Africa’s latest Manufacturing PMI data also jumped up to 50.8 – its best level since December 2016, while mining production increased by 0.1% December, beating forecasts for an 8% contraction and buoying hopes for a sharp economic rebound in 2021.

The Chinese yuan (CNY) has traded in a sideways range this week due to the Asian holiday period and monetary policy action from the People’s Bank of China (PBoC).