Forex: How pound has fared over the year

·Business reporter
·8 min read
Pound and U.S. dollar banknotes
The pound had initially benefited in the wake of the UK striking a trade deal with the EU on Christmas Eve 2020. However, investor focus quickly shifted from Brexit to the pandemic and the economic backdrop. Photo: Dado Ruvic/Illustration/Reuters

The first day of 2021 marked not only the start of the new year but the beginning of a new journey for Britain as it left the European Union.

The pound started the year against the dollar (GBPUSD=X) at $1.3625, and at €1.1041 against the euro (GBPEUR=X). It has since had a rollercoaster journey, battling lockdowns, COVID restrictions, rising inflation, and record low interest rates.

In January, the currency suffered slightly against the dollar as England entered its third national lockdown, which lasted until the middle of February, due to rising cases of coronavirus.

UK prime minister Boris Johnson told people at the time to remain and work from home, while non-essential retailers stayed closed, along with primary and secondary schools across the country.

The pound had initially benefited in the wake of the UK striking a trade deal with the EU on Christmas Eve 2020, after a painstakingly long negotiating period. However, investor focus quickly shifted from Brexit to the pandemic and the economic backdrop.

A few weeks later it reached a fresh three-year high against the dollar, trading at $1.3758 thanks to vaccine rollout optimism. This was sterling’s strongest level since May 2018. It was also up against the euro at €1.1312.

The pound climbed at the start of the year and then fell sharply in the second half. Chart: Yahoo Finance
The pound climbed at the start of the year and then fell sharply in the second half. Chart: Yahoo Finance

The currency was helped by Britain leading the continent’s vaccination race, after becoming the first country to approve the Pfizer (PFE) jab.

February bought better luck for the pound, which continued its climb and soared to a 33-month high, breaching $1.39 for the first time since April 2018. News of the UK inoculating 15 million people in the top four priority groups by 15 February came as a welcome boost.

Days later it hit $1.40, shrugging off disappointing UK data amid a wave of vaccine optimism and hopes of eased lockdown restrictions in the country. But it was not as buoyant against the euro, retreating from 11-month-plus high in the middle of the month to fall slightly.

Over the next two months the pound was under pressure as traders turned to safer assets such as the dollar amid a sell-off across global markets. It came after a sharp spike in bond yields, with investors adopting a risk-off approach.

Markets were also hedging the risk of an earlier rate hike from the US Federal Reserve at the time, despite officials vowing earlier in the week that any move was long in the future.

With equities on the back foot the US dollar continued its positive run, rising to its highest level since the beginning of December 2020.

Read more: Investing: New Year's portfolio resolutions

However, April to May saw the pound steam ahead against a basket of currencies as the UK economy started to open under the PM’s roadmap out of lockdown.

People in England were able to meet in groups of six from any number of households for the first time in months, ending the usual “stay at home” messaging, and later were able to dine and mix indoors. Limited international travel also resumed.

By 21 May, sterling was trading higher against the greenback at $1.4211, on track for its third consecutive week of gains against the currency, while it was at €1.1630 against the euro. The dollar was held back by expectations that America will continue to stimulate its economy through loose monetary policy and high government spending.

After hitting its highest level of the year on 28 May ($1.4171) things have been downhill for the pound for the second half of 2021, as the dollar continued to strengthen. It has, however, managed to remain bound between €1.15 and €1.19.

Watch: Markets bounce back, ringing in holiday cheer once again

In mid-June, the pound slumped to its lowest level in six weeks as the greenback strengthened on news from the Federal Reserve, and the UK government extended a partial lockdown in England.

The dollar has gained momentum after the Fed updated its “dot plot”, showing it has pulled forward its first expected post-pandemic rate rise to 2023 as it looks to prevent overheating in the economy.

The dot plot maps out each member’s expectations for rates over coming years. In March this year it showed the median member expecting no rate hikes through that time horizon. The upward revision suggested that the Fed saw a faster-than-expected recovery.

Although sterling had strengthened during the first half of the year on the back of a successful vaccine rollout programme in the UK, it was also affected by poor retail sales in May and rising COVID cases in Britain.

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“Investors looked at [the] performance of the retail sector with some concern, as the country’s economic recovery, and the strong performance of the pound, have to a large extent been driven by consumers spending savings accumulated during the months of lockdown,” Ricardo Evangelista, senior analyst at ActivTrades, said at the time.

“This slowdown could mark the end of a ‘Goldilocks’ period for sterling, with the shine of a successful vaccination program wearing off, following the extension of the country’s partial lockdown, and consumer spending receding as the end of furloughs looms.”

The summer months of 2021 were riddled with supply chain woes, a petrol shortage, and inflation concerns.

Andrew Bailey, the governor of the Bank of England (BoE), insisted that an increase in inflation, which rose above the Bank’s 2% target, will be temporary, warning policy makers against overreacting to the jump. But it did not stop the pound from suffering.

Watch: What is inflation and why is it important?

As the last quarter of the year came, inflation figures continued to rise, a new coronavirus strain emerged, supply chain pressure still persisted, and rocketed wholesale gas prices added to the mix.

The BoE surprisingly left interest rates unchanged in November, which knocked the currency further after markets priced in a rise from 0.1% to 0.25%.

Sterling was trading at $1.343 and €1.166 after the news that Threadneedle Street wanted to see how the jobs market manages with the end of the furlough scheme.

“For sterling, the decision was akin to a trap door through which the pound tumbled. We have pointed out for many weeks now that these rate expectations were really the only thing holding the pound up and with them either gone or severely weakened GBP is looking for what else can support it,” Jeremy Thomson-Cook, chief economist at Equals Money, said.

“In a winter of COVID-19, Brexit supply and legal issues, higher energy costs and an uncertain employment outlook there’s not too much to be banging the drum on sterling for.

“It will still likely outperform the euro in the coming weeks but those looking for strong material gains against the USD may have to reappraise their thinking.”

Weeks later the pound slumped to its lowest level of 2021 against the dollar ($1.3210) as the US central bank hinted at wrapping up its stimulus programme, and raising interest rates, earlier than anticipated to counteract rising inflation.

Read more: Food and fuel prices push UK inflation to 10-year high

The US dollar index was hovering around its highest level since July 2020, and also pushed to its best level against the Japanese yen in nearly five years. It had now risen by more than 6% since its low in late May, just six months ago.

Finally, on 16 December the BoE hiked UK interest rates from 0.1% to 0.25% for the first time since the start of the pandemic in a bid to combat soaring inflation. This managed to give the pound a small boost, although it is still trading at lows of the year.

The Monetary Policy Committee (MPC) voted 8-1 to take action amid pressure from the International Monetary Fund (IMF), who discouraged it from any further delays.

UK inflation soared to its highest level in more than a decade last month, climbing to 5.1%, according to the Office for National Statistics.

This was significantly more than the Bank of England’s (BoE) 2% target and well above the expectations of 4.5%, thanks to the rising cost of clothing, fuel and second-hand cars.

"The Bank of England’s decision to raise interest rates was surprising given mounting uncertainty over the economic impact of the Omicron variant. While today’s rate increase may have little effect on most firms, many will view this as the first step in a longer policy movement – not as a partial reversal of last year’s cut," Suren Thiru, head of economics at the British Chambers of Commerce (BCC), said.

"While policymakers are facing a tricky trade-off between surging inflation and a stalling recovery, with the current inflationary spike mostly driven by global factors, higher interest rates will do little to curb further increases in inflation."

The spread of Omicron and possible pending lockdowns in the UK have since taken their toll on the pound since the interest rates decision.

"Boris Johnson's government is a mess now with a series of issues and the by-election loss recently, combined with resignations and now COVID related restrictions in the short term could see the pound soften up some more on these issues," said Brad Bechtel, global head of FX at Jefferies LLC.

Latest positioning data has revealed that traders are still bearish on the British currency with short pound bets at their highest levels since October 2019.

Watch: Will interest rates stay low forever?

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