Pound-to-Dollar Rate Buoyed by Coordinated Stimulus from London and Disappointment with Washington

- GBP/USD supported by stimulus as disappointment grows in U.S.

- BoE rate cut, Gov budget support UK growth outlook and lift GBP.

- After White House leaves markets empty handed amid infighting.

- Republican-Democrat talks yet to produce deal on fiscal support.

- U.S. offficials exploring other options as politics hamper virus aid.

- Lack of fiscal support, lower yields, action elsewhere weigh on USD.

- Comes as U.S., other major economies, brace for virus epidemics.

© The White House

- GBP/USD Spot rate: 1.2915, up +0.08% today

- Indicative bank rates for transfers: 1.2568-1.2658

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The Pound was buoyed Thursday by a coordinated effort between government and central bank to support the economy as it braces for a possible coronavirus epidemic, as the Dollar sagged in response to growing market disappointment with Washington and a reduced yield appeal to investors. 

Pound Sterling was higher against the Dollar, Euro and some other major currencies despite the Bank of England (BoE) chopping Bank Rate 50 basis points back to its record low of 0.25%, as markets welcomed the rate cut and other measures designed in an unscheduled meeting by policymakers seeking to help companies and households through what could be unprecedented disruption due to the viral pneumonia now spreading in 117 countries.

"GBPUSD has reversed its initial rate cut-induced weakness in a sign that FX markets are likely to reward currencies where the authorities are willing and able to act to counter the macro risks presented by the viral outbreak. This puts today's UK budget announcement into clear view as the next major directional driver for GBP," says Ned Rumpeltin, European head of FX strategy at TD Securities. "An underwhelming fiscal package could quickly bring a test of 1.2740 into view in the days ahead - especially if sentiment sours more broadly...a more positive and expansionary outcome could see cable move back to 1.2980 ahead of more meaningful resistance...around 1.3020."

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

The BoE's rate prompted a short-lived knee jerk decline in Pound Sterling exchange rates that faded quickly as investors took stock of the material stimulus delivered to the economy, which the bank estimated is equal to around 1% of GDP, while looking ahead to Wednesday's budget that gets under way in earnest from 12:30. The budget is expected to produce further measures aimed at supporting the economy through the virus crisis, as well as a possible £100 bn uplift in investment for the next five years. 

Outgoing Governor Mark Carney described the Bank of England as acting in "concert" with government to minimise the damage caused to the economy by the virus, and investors have so-far welcomed the move while marking down the U.S. Dollar after the White House left markets empty handed on fiscal support as political jockeying between Republicans and Democrats hampers the government response to what is now a growing coronavirus crisis in the U.S.

"Unless markets see a materially more expansive UK budget than the already potent set of expectations priced in, we see no reason to change our expected GBPUSD trading range. We still see value in buying on dips towards 1.2800, with a stop loss around 1.2700," says Shahab Jalinoos, head of FX strategy at Credit Suisse. "We continue to expect a USD underperformance against defensive currencies JPY, CHF and EUR, we are bearish the pro-cyclical G10 currencies (e.g. CAD)."

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

The White House had been expected to unveil its own support package Tuesday that was supposed to include aid to households and some of the industries most affected by the virus, including the cruise and airline industries. But the promised evening press conference never materialised and President Donald Trump's brief account of talks with Democrats, given to a reporter on Tuesday, suggests politics is playing a role in the slow-moving response that could prompt more losses for U.S. stocks on Wednesday.

The Wall Street Journal reported Tuesday evening thtat Treasury is exploring the merits of a delay to an April 15 tax filing deadline, which would enable households to use tax monies as a form of bridge finance, because such measures could be implemented quicker because they would not require the approval of a Democratic Party controlled House of Representatives.

"The US response is to the coronavirus is an unfolding tragedy that will get far worse," warns John Hardy, head of FX strategy at Saxo Bank. "USD turning lower is our new strategic conviction – the difficulty in the near term being the risk of back-filling – first we like it lower versus JPY, EUR and then GBP."

Above: Dollar Index shown at daily intervals.

U.S. lawmakers are dragging their feet as coronavirus threat to the ecnomy grows and the Dollar suffers from the 50 basis point rate cut announced by the Federal Reserve last week, which has radically reduced the greenback's yield offering to investors and driven sweeping declines in the Dollar Index.

The Center for Disease Control and Prevention (CDC) said Tuesday it was aware of 647 cases of coronavirus in the U.S., a number cited by President Trump that same day, although this excludes the 83 cases imported from China and elsewhere. However, other figures from Johns Hopkins University suggested on Wednesday the actual number had crossed the 1,000 threshold, up from less than 300 on Friday. This is after four million testing kits were delivered to state authorities to make up for an earlier shortage. 

China and now, Italy, have both imposed draconian restrictions on the movement and activities of people in order to contain their outbreaks while some citizens self-isolated, likely dealing their economies a significant blow in the process. And with infection numbers rising elsewhere in Europe as well as in the U.S., fears are that such measures might soon be necessary in those countries too. New York City has already placed some restrictions on public gatherings in New Rochelle. 

"For the dollar, to the extent to which expectations of fiscal measures stall, the currency is likely to suffer as the market will pencil in more meaningful Fed easing, shifting from expectations of the US Fed funds rate falling to the lower zero bound - now largely priced in – to expectations of / hopes for a re-start of QE. This would be dollar negative across the board. Price action overnight reflects that clearly, with USD struggling against most G10 currencies," warns Petr Krpata, chief EMEA strategist for currencies and bonds at ING.