Pound-Dollar Exchange Rate Leaps Back Above 1.31 amidst Financial Stresses

- USD suffers amidst market meltdown
- GBP/USD back above 1.31
- "Signs of stress in financial markets are evident everywhere"

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- GBP/USD spot: 1.3147, +0.80%
- Bank transfer rates (indicative): 1.2787-1.2879
- FX specialist rates (indicative): 1.2950-1.3029 >> More information

The U.S. Dollar appears to be a notable casualty of the Monday market meltdown, with selling of the greenback aiding a move back above 1.31 in the Pound-to-Dollar exchange rate.

The Dollar's decline comes alongside a substantial sell-off in oil and global equities, with markets in the red on Monday as further pricing adjustments are executed to account for the ongoing economic impact of the coronavirus.

Over the weekend it was confirmed that the spread of the disease outside China continues and authorities continue to take measures to prevent its spread, which in turn potentially has significant economic costs. For instance, the decision to quarantine the population of Lombardy will have significant impacts for the Italian, and by extension Eurozone, economy.

However it will likely be a rapid decline in consumer sentiment right across the Northern Hemisphere that shifts the global economy into recession, as the consumer retreats we will see a sizeable decline in the purchase of goods and demand for travel while investment decisions are pared back by both individuals and businesses alike.

Expectations for recession are reflected in the price of oil which slumped an eye-watering 30% when markets opened on Monday. Long-term charts suggest this is the single largest fall in the value of crude since the Kuwait war of 1990.

"Equity markets continue to react to the spread of coronavirus, which has seen Italy put its most prosperous regions on lockdown, but it is the collapse of the oil price and the end of OPEC+ (and of OPEC itself?) that is providing a fresh reason to head for the exits. Oil firms, and US shale oil companies too, will face serious pressures with oil now trading around $30 for WTI and $33 for Brent. Such pressures will include funding problems, spreading through the broader economy and ramping up expectations of more rate cuts, and potentially monetary easing," says Chris Beauchamp, Chief Market Analyst at IG.

The problem for markets is that turning consumer demand on again is not so simple. If the slump in demand were a result of a breakdown in credit markets (as was the case in 2008), then central banks would be able to step in and stabilise the situation. However, central banks can't shift public sentiment on coronavirus, this is something left to medical practitioners and governments.

The Federal Reserve is therefore left looking toothless despite an apparent 'shock and awe' attempt to slash rates last week. Markets are betting the Fed will nevertheless take another shot at stabilising the situation by delivering further rate cuts, which could further hamper the Dollar.

"The problem is it's a supply side problem and throwing money at a supply side problem may not help" says David Bloom, senior foreign exchagne analyst at HSBC, "that's why people are sceptical of central banks cutting rates."

The Dollar index - a broad measure of Dollar value via a basket of major Dollar exchange rates - is dropping and has measured declines since markets started selling off in late February:

Above: The Dollar is a sell in the current environment of market anxiety.

We have warned that the British Pound remains vulnerable in the current environment owing to the currency's heavy reliance on the inflow of foreign capital, something that tends to dry up when global investors are running scared.

However, it is clear that the Pound-to-Dollar exchange rate is ticking higher in the current environment. The pair is currently quoted at 1.3165, having been as low as 1.2742 on March 03. While the exchange rate is surging, as is the case with Euro-Dollar, Sterling nevertheless looks well supported and we would imagine any further sell-off in global markets could aid GBP/USD higher.

Above: Short-term chart for GBP/USD

"Signs of stress in financial markets are evident everywhere, as the Vix continues to hold above 40, signalling deep distress in equities and rampant fear among investors, while gold’s climb continues, seeing the metal touch $1700 last night for the first time since February 2013. There seems little hope now that normal service can be resumed soon; even if the coronavirus vanishes in the space of a few weeks the economic and financial dislocation will take months to sort," says Beauchamp.