Pound-to-Dollar Rate Down Through Key Level as Market Mood Sours Again

-GBP down through major chart support amid strong USD demand.

-Commerzbank says “this is negative price action”, eyes 1.2290.

-Price action comes ahead of a 19:00 hrs Trump press conference.

-But GBP already left in the cold amid earlier recovery in risk assets. 

-MUFG says Fed’s QE4 will restrain and eventually weaken the USD.

-Moneycorp warns on market volatility, against “overhedging” in FX.

- Watches for "inevitable developments" in Gov "continency planning."

Image © White House

- GBP/USD Spot rate: 1.2355, -1.7% on publication

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The Pound-to-Dollar rate crashed through a key level on the charts Friday amid broad weakness in the British currency and strong demand for the greenback as the market mood turned sour again ahead of the weekend break. 

Pound Sterling was already on the back foot amid an earlier rebound in risk assets like stock markets and “high-beta” currencies but losses stepped up a gear following the North American open and an announcement that President Donald Trump will hold a coronavirus related press conference at 19:00 London time. It did not share in the risk rebound that took place Friday and was underperforming most others in the subsequent risk sell-off. 

The market mood had brightened after the Federal Reserve (FEd) stepped into a Thursday sell-off that was vicious enough to rival those seen in financial crisis, offering an eye watering amount of liquidity and what some analysts say is a fourth quantitative easing program. But the atmosphere soured after the north American open Friday, with gains for stock markets pared back while the Pound-to-Dollar rate fell through a key level on the charts. 

“This is negative price action. The move below the 1.2550/61.8% retracement targets the 78.6% retracement at 1.2290 – this is regarded as the last defence for the 1.1958 September low,” says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank. “Rallies are likely to now find the 200 day ma at 1.2705 acts as near term resistance and we look for the market to ideally fail on rallies into the 1.2705/60 band.”

The Pound-to-Dollar rate fell through the 1.2550 level Friday that coincides with the 61.8% retracement of the September 2019 uptrend in what is a bearish technical development as far as the outlook goes.

The next support level down is the 1.2290 threshold, which is the 78.6% Fibonacci retracement of the September uptrend and once beneath there, the British currency faces the prospect of a sheer drop back beneath the 1.20 handle. Those are very low levels that are rarely seen. 

Above: Pound-to-Dollar rate shown at daily intervals, breaking through 61.8% fibonacci retractement of 2019 trend.

Investors were selling stocks and typically safe-haven bonds simultaneously late Friday, with earlier high-single-digit gains pared back by around half as investors appeared to continue what some have said is a possible and potentially problematic rotation back into cash. And amid all of the selling, one of the few things that has been bought heavily is the U.S. Dollar, which swept the board of all opposition Thursday and almost did so again on Friday.

"Our view remains that until there are clear signs that the coronavirus pandemic is abating, equities and other risky assets will remain under pressure and could easily fall further," say Jonas Goltermann at Capital Economics. "Assets which typically act as safe havens lost value yesterday. For example, the price of gold fell, and the Japanese yen lost ground against the dollar. That is consistent with widespread forced selling from market participants facing redemptions and margin calls, and non-US banks struggling to maintain wholesale dollar funding, which is similar to what happened during the worst of 2008-09 and the 2011-12 euro-zone crisis."

It’s difficult for anybody to be certain about what’s driving such strong demand for the Dollar, especially after two eye watering $500 bn offerings of liquidity to the banking sector went heavily undersubscribed at the Federal Reserve. The Fed accepted all bids that it received in Thursday and Friday’s open market operations but doing so saw it dole out only $78.4bn and $24.1 bn respectively.

MUFG, the world's fifth largest bank, says the Dollar is unlikely to depreciate any time soon but that the Fed’s relaunch of quantitative easing should soon restrain the runaway greenback. This is after the Federeal Reserve Bank of New York set the stage Thursday for a formal announcement of a fourth round of government bond buying next Wednesday at 18:00.

"This is essentially confirmation from the Fed of an effective re-start of Quantitative Easing. That makes this QE4!,” says Derek Halpenny, head of research, global markets EMEA and international securities at MUFG. "We believe these actions will greatly diminish the prospect of dollar gains and general volatility like we saw yesterday...The dollar is unlikely to depreciate any time soon but yesterday’s Fed announcements will help limit the scale of the moves. Once risk aversion eases to a degree, we view the dollar as very vulnerable to a period of depreciation.” 

Above: Dollar Index shown at daily intervals alongside GB and U.S. 10-year Gov yields, which rise as bonds are sold.

Friday’s lurch lower by the Pound-to-Dollar rate came on an afternoon when the World Health Organization (WHO) officially acknowledged that the coronavirus epicentre is now Europe, where the main hotspot is Italy while Spain is closing the gap with the second largest outbreak. And the UK reported its largest daily increase in coronavirus cases for a second consecutive day and questions were asked of whether the government has done enough to contain it. 

Meanwhile, the Brazialian President Jair Bolsonaro was reported to have tested positive for coronavirus on Friday and the Canadian Prime Minister Justin Trueau was in self-isolation after his wife was confirmed to have the infection. The White House was reported to have called an emergency meeting as a result and President Donald Trump is known to have had contact with people who’ve since been confirmed as infected. 

Government officials and ministers from across the developed and emerging worlds have tested positive for the virus, including in the UK. Meanwhile, increasing numbers of countries are shutting schools and universities while banning public gatherings in an effort to contain the spread, which risks overloading healthcare systems if not kept at bay. And in amongst all of this, countries are increasingly contemplating stricter border controls that could be a risk to the already damaged supply chains of internationally trading companies. 

“It’s vital that businesses rethink their strategy for opening up their supply chains after stockpiling in Q4, and don’t over-hedge their trades,"  says Lee McDarby, managing director of corporate foreign exchange and international payments at moneycorp. "We are living in unprecedented times, and nothing should be unexpected – recent rate cuts outside the session across Norway, Europe and the Fed are testament to this. The main concern now is how inevitable developments in the UK’s Covid-19 continency planning plays out.”