Pound-to-Dollar Rate Below 1.20 Amidst Liquidity Crunch

- GBP/USD tests 1.20 level
- GBP unloved amidst market selloff
- Further USD strength likely

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- GBP/USD spot at the time of writing: 1.1988, -1.08%
- Bank transfer rates (indicative): 1.1670-1.1755
- FX specialist rates (indicative): 1.1800-1.1880 >> More information

A combination of negative investor sentiment and a global crash crunch continues to place downside pressure on the Pound-to-Dollar exchange rate which looks set to extend its ongoing sell-off and ultimately fall below the psychologically important 1.20 marker.

Chatter amongst foreign exchange analysts is GBP/USD is showing potential for a fall back to the post-EU referendum lows of 1.12, reached in a flash crash in October 2016.

Since late February the British Pound has lost value alongside the sell-off in global stock markets; confirmation that the currency remains reliant on inflows of foreign investment. When investor sentiment plummets so too does the inflow of investor capital into the UK which has long been a source of support for Sterling.

"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. Today, we add to that and consider the potential for GBP to reach, what is in our view, it’s Hard Brexit equilibrium of 1.15-1.18," said Jordan Rochester, Foreign Exchange Strategist at Nomura in a note to clients issued on Monday.

However, the downside move in the GBP/USD exchange rate has accelerated of late as dislocations in global financial markets stoke strong demand for cash, which has in turn lead to increased demand for the world's reserve currency: the Dollar.

"Liquidity remains a key issue in the markets, and despite large fiscal packages being presented to combat the economic impact of the coronavirus, equity and risk markets remain under pressure with a continued demand for USD," says Robin Wilkin, Cross Asset Strategist at Lloyds Bank.

Above: GBP/USD since the global market meltdown. The traditional market adage is to not try and catch a falling knife.

The clearest signal of the premium cash is attracting comes from the performance of gold. Gold prices have fallen sharply over recent weeks at a time when one would expect the precious metal's safe-haven credentials to be in demand. What is more ivaluable than gold? The answer is cash.

U.S. authorities are aware of the cash crunch facing various financial institutions and have responded.

The Federal Reserve has this week announced it will make available an eye-watering $1 trillion in cash for repurchase operations (Repo) every day this week.

This comes in addition to the Fed's weekend announcement that it would make $700BN available via a renewed programme of quantitative easing. (Repos offer short-term cash injections, QE money is seen as being a longer-term addition).

Until we see signs that stresses are fading we would imagine the outlook for the Dollar would remain positive, which should ultimately result in further downside forces bearing on GBP/USD.

"Prices attempted to stabilise over the 1.2000-1.1950 area of support, but so far price action still looks corrective on rebounds," says Wilkin. "Support below 1.1950 lies in the 1.1870-1.1820 region and then there is little in the way until the October 2016 flash crash low of 1.1490."

U.S. authorities could well ease the pressure on the funding market and therefore ease demand for the Dollar via various monetary and fiscal initiatives. However, the root cause of the stresses remains the market dislocations associated with the coronavirus pandemic.

The pandemic is predicted by health authorities to continue spreading in Europe and the U.S. for some weeks, therefore we could still be some way off for the fundamental improvements markets are looking for.

"Currently we are not witnessing normal market behaviours and moves have become non-linear. Thus we cannot rule out additional surprise easing measures from central banks, more official lockdowns and government containment measures as well as continued negative COVID-19-related newsflow. Credit is likely to remain under pressure, especially in sectors directly affected by containment measures and not yet offered enough support by governments to weather the storm," says Rochester.