The GBP/USD was relatively resilient in March. In the month, the sterling declined by more than 1.50% against the US dollar while the dollar index rose by more than 3%.
GBP/USD vs. dollar index
Strong dollar environment
The stronger dollar and higher US bond yields were the main topics in March this year. The dollar index rose by more than 3%, while the yield on the five, ten, and 30-year US government bonds rose to the highest level in more than 14 months.
This performance happened as investors started to price-in higher inflation as the US passed the $1.9 trillion stimulus package. This is in addition to the $900 billion package passed in January. At the same time, rumors started to emerge of another $3 trillion infrastructure package.
Meanwhile, crude oil prices rose to $70 a barrel while other commodities rallied. While the momentum has faded, there are signs that they could rebound as the commodity supercycle continues. As such, there is a possibility that inflation could reach the Fed’s target in the second quarter. Some analysts, including Larry Summers, have also warned that prices could rise to more than 4% this year.
The implication of all this is that the Fed could reluctantly turn hawkish as it tries to tame inflation. In the past statements, Jerome Powell has stated that the bank will not hike or start tightening any time soon.
Recent data from the UK and US have shown that consumer prices are relatively mild. In the UK, clothing and automobile prices dragged inflation in February. This was partly expected because the country was in lockdown during the month. In the US, the headline and core CPI came in at 1.7% and 1.4%, relatively lower than expected. Like in the US, the UK Gilts also rose in March, as shown below.
UK yield spread
UK recovery efforts
The GBP/USD declined lower than other currencies in part because of the government’s coronavirus vaccination efforts. The latest numbers pointed to more than 29 million vaccinations in the UK. This is a relatively strong number considering that the country has been vaccinating for about three months. Therefore, there is a possibility that the country will conclude the vaccination process in the next few months.
Recent data from the UK have been relatively positive. For example, in March, data from the Office of National Statistics (ONS) showed that the country’s unemployment rate dropped from 5.1% to 5.0%. This was better reading than expected and was mostly because of the government’s furlough program.
Also, recent data by Markit showed that the manufacturing and services output expanded to above 50 in March as the reopening process continued.
Therefore, fears of negative interest rates in the UK have waned substantially. As the trend continues, there is a possibility that the bank will even start being hawkish. The BOE will not deliver its interest rate decision in April.
GBP/USD technical forecast
The GBP/USD rose to a multi-year high of 1.4245 in February. In March, it erased some of those gains as it declined by more than 4% from its year-to-date high. On the daily chart, the pair moved above the lower line of the ascending channel. The pair has started moving above this support and is slightly below the short and medium-term moving averages. Therefore, the pair may rebound in April as bulls start targeting the year-to-date high of 1.4245.