It is now more than just the Brexit saga or the US-China trade tensions: the coronavirus pandemic threatens all the financial markets around the globe, including the most liquid one – forex. Unfortunately, investors’ all-time favourite “Cable” is not an exception.
On March 18, the British pound plunged 5 per cent against the US dollar to hit its lowest level in over three decades as the coronavirus outbreak continues to hamper global markets.
Neil Jones, a head of foreign-exchange sales to financial institutions at Mizuho Bank Ltd, commented on the reasons behind the latest GBP/USD fall: “A combination of the safe haven dollar bid, the global asset sell-off and liquidation of long positions from the election are all weighing on the pound.”
In this article, to answer this question, we take a look at the pair’s recent performance and check the key drivers behind its turbulent fluctuations. In addition, you will find a video where our chief market strategist – David Jones – gives the latest GBP/USD technical analysis and suggests some up-to-date trading tips.
What happened to the pairing of GBP to USD last week?
On Friday March 20, the GBP/USD pair closed one of its worst weeks in years. On March 18, the British pound shed its value to $1.1409, surpassing the lows it recorded in 2016 in the aftermath of the Brexit referendum. It was last lower only in 1985, when the Plaza Accord was signed to pull the US economy out of a recession and weaken the dollar.
Neil Wilson, a chief market analyst at Markets.com, noted: "Sterling has completed one of its steepest declines in memory by hitting its weakest level since 1985, excluding if you will the brief dive of the Oct 2016 'flash crash’. This is the worst sustained period of sterling selling that I can recall."
The USD has been recently enjoying its premier status of a safe-haven currency amid fears of the economic recession caused by the coronavirus pandemic. Frightened investors run to the exits, selling everything they can to keep their cash in dollars in attempts to survive the unprecedented amount of uncertainty.
The hike in the US currency over the last two weeks has pushed the DXY Index above 100 to hit its three-year high.
To mitigate the economic impact of the ongoing pandemic, the Bank of England cut interest rates to a record-low 0.1 per cent on March 19, while also adding £200 billion ($230 billion) to its asset-purchase programme.
At the start of this week (March 23), things have finally started to look a bit more optimistic for the GBP.
The latest Fed announcement boosts risk appetite
On Monday, the US Federal Reserve announced they would be offering markets as much liquidity as they could. It pledged to start several supportive programmes including purchases of corporate bonds and guarantees for direct loans to companies. It also presented a plan to give small and medium-sized businesses credit.
The latest Fed’s statement seemed to boost investors’ risk appetite, with the US dollar starting to lose its ground. Amid the easing demand for the safe-haven greenback, the DXY Index has also fallen. down by around 1 per cent on Tuesday morning (March 24).
Koichi Kobayashi, a chief manager of forex at Mitsubishi Trust Bank, commented: “We seem to have got out of a phase where everything from stocks to safe assets such as bonds and gold were sold.
“The dollar funding conditions are easing slightly, compared with a week ago, though I wouldn’t say things are normal. While the Fed is pumping dollars, we still need to wait and see if that money will flow to every corner of the economy,” Kobayashi added.
Moreover, the outlook for the markets now looks a bit brighter following the decision by Hubei province, China, to finally lift travel restrictions on people leaving the region as the epidemic there eases.
The lower demand for the US dollar has benefited the GBP/USD rate. At the time of writing, March 24, the pair traded at 1.178.
But the UK’s current situation is anything but certain
Over the past couple of weeks, many have criticised Boris Johnson, citing his response to the coronavirus outbreak falling short compared with measures taken by other European nations. However, on Monday, British PM revealed a list of new strict measures meant to slow the spread of the fatal virus across the country. Those included a ban on gatherings of more than two people and the immediate closure of shops selling non-essential goods.
Johnson also called the pandemic the “biggest threat this country has faced for decades”.
In addition to the overall virus panic, the latest data revealed the UK PMI composite had fallen to a record low of 37.1. The figures indicated a record plunge in business activity, as well as the worst contraction of the service sector since records began.
It is important to note that the relative stability in GBP/USD remains rather fragile and, while further steep falls now look less likely, there is yet little sign of a sustained long-term rally.
GBP/USD analysis: the technical perspective
Do you want to learn what has been happening recently to this forex behemoth from a technical point of view and find out how to profit from the volatility? Are you wondering where the rate of this currency pair is heading next? Watch David Jones, chief market strategist at Capital.com, make his own GBP/USD technical analysis and review the commodity’s most recent performance:
Always stay on top of the latest GBP/USD analysis by subscribing to Capital.com’s YouTube channel.
GBP/USD short term forecast: what happens next?
While it is very hard to predict the future of the market, what should we expect next from this forex titan going forward?
According to Thomson Reuters’ market analyst Peter Stoneham, the COVID-19 outbreak may take the British currency "to places even Brexit couldn't reach".
He said: "Sterling might drop through its post-Brexit-vote lows against the US dollar, euro and yen if risk aversion caused by the accelerating coronavirus outbreak continues.”
Jordan Rochester, a FX strategist at Nomura International, said: "The UK is a current account-deficit country with a higher exposure to financial risks, which is a key reason why we have maintained a short GBP/USD and long EUR/GBP position in recent weeks.” Rochester's prognosis is that the GBP is poised to reach levels it would have tested in the event of the UK suffering a hard Brexit.
However, if the Fed decides to take further measures to support its economy, causing risk appetite to increase, it could possibly offset weak UK economic data, allowing the GBP/USD rate to finally recover and even hike higher.
We recommend keeping a track of health-related coronavirus headlines, fiscal stimulus news and economic figures as these are all expected to remain the key market movers in the coming weeks.
Trade British Pound / US Dollar CFD
That said, it is important to note that the entire situation is very fluid right now, with the markets acting rather unpredictably. Today, investors and traders need to be ready to make quick yet thoughtful decisions to stay afloat during times of economic turbulence.
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