Pound-to-Dollar Rate Benefits amid Global Flight to Safety as Charts Point Higher

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- GBP/USD Spot rate: 1.2959, up +0.28% today

- Indicative bank rates for transfers: 1.2576-1.2667

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The Pound gained on the Dollar in what was a resilient performance from the British currency amid a global flight to safety on Tuesday as markets fixated on the continued spread of coronavirus outside of China including in Europe, and some analysts are suggesting that further gains are possible. 

Pound Sterling was an outperformer Tuesday as risk assets extended Monday’s punishing declines and investors continued to flock toward perceived safe-havens amid mounting concern over the spread of coronavirus outside of China, with outbreaks confirmed in South Korea, Japan, Italy and others.

Italy has quarantined towns and villages in its Northern regions in an effort to halt the spread of the virus, the first sign in Europe of the same kind of disruption that's brought China's economy near to a standstill this year. 

This is as containment efforts continue to see China's economy operating substantially beneath its capacity.

"Amidst the "doom and gloom", the GBP continues to offer a ray of hope. Though we need to respect the fact that a lot of "fiscal easing" in the UK is already discounted heavily into some asset prices, we still think the March Budget will reinforce the fact that 2020 as a whole is going to be a year of fiscal & reform dynamism for the UK. If anything, the COVID-19 outbreak in Europe increases the chance of there being a decent mix of long-term and short-term (countercyclical) measures in the March Budget.," says Stephen Gallo, European head of FX strategy at BMO Capital Markets. 

Above: Pound-to-Dollar rate shown at 4-hour intervals. 

Investors dump stocks and commodities while bidding up safer assets like government bonds this week, a pattern that's proving supportive of Sterling. With the Dollar aside, the Pound is the only other one of five traditional 'major' currencies to have short-term bond yields that are above the zero level. 

Sterling has been battling to keep its head above water of late although this week so-far appears to have put wind in the sails of the Pound-to-Dollar rate, leading it back toward the upper boundary of a "falling wedge" continuation pattern on the charts as investors bet increasingly heavily the Federal Reserve (Fed) will cut its interest rate multiple times before the year is out. 

Rates market pricing has shifted in recent weeks from implying that barely more than one rate was likely this year, to confidently wagering that three cuts are now all but a certainty which has brought American government bond yields back toward record lows set years ago, and dented appetite for the Dollar in the process. The greenback was still rising against most currencies Tuesday, just not Sterling, the Japanese Yen or Swiss Franc.

"GBP/USD is holding steady and is well placed to test the 55 day moving average at 1.3049 and the short term downtrend at 1.3057. The potential falling wedge is intact and a close above the downtrend will complete it. This will alleviate downside pressure and should be enough to trigger recovery to initially 1.3285 and the 2015-2020 resistance line at 1.3402. Dips lower should ideally hold over the 1.2849 recent low," says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank.

Above: Pound-to-Dollar rate shown at daily intervals. 

Pound Sterling was trading resiliently on Tuesday even after the European Council set out its objectives for the Brexit negotiations, which confirmed the bloc will demand the UK government closet-index the substance of any new laws on "state aid, competition, state-owned enterprises, social and employment standards, environmental standards, climate change, relevant tax matters and other regulatory measures," to those of Brussels after it's supposed to have regained independence from the bloc come year-end. 

EU leaders neglected to explicitly use the term "alignment" although that's what it's asking for just days before the UK government is expected to set out its position ahead of talks that are set to get underway next month. Both parties have until the end of June to put meat on the bones of an agreement or oragnise an extension of the current transition period beyond December 31, and some analysts expect that this deadline will risk seeing 'cliff edge" concerns again weighing on sterling from mid-year onward.

Prime Minister Boris Johnson's withdrawal agreement gives rise to possible constitutional consequences for all of the UK but especially Northern Ireland in the even the "backstop" is activated although this doesn't completely eliminate the prospect of something like a "no deal" Brexit from happening in 2021.

"We continue to view anticipation of fiscal stimulus in the 11 March budget as a GBP-supportive factor in the short-term, especially against EUR, where the potential for constructive fiscal policy surprises is arguably low. We remain doubtful about the actual potential impact of the budget on growth, but in the meanwhile we can see scope for markets to be hopeful. As for EU-UK trade negotiations, we suspect they will not become the market’s focal point as long as the budget is in the way," says Shahab Jalinoos, head of FX strategy at Credit Suisse in a recent note to clients.