British Pound Correction Lower Continues, Even as Stock Markets Recover

© Moonrise, Adobe Stock

• Pound-to-Dollar exchange rate: 1 GBP = 1.3881 USD
• Pound-to-Euro exchange rate: 1 GBP = 1.1249 EUR

Pound Sterling is the second-worst performing currency today as it continues a February sell-off that even a recovery in global stock markets is unable to halt.

Markets are falling and rising, and yet unfortunately for those wanting a stronger Pound, the traffic is one-way: lower.

The Pound was a notable loser amongst the eye-catching slide in global stock prices that has been underway since Friday, February 2 and accelerated on Monday, February 3.

The spectacular selling of global stocks at the start of this week - which some estimates say amounted to $4 trillion - saw a spike in volatility with the CBOE VIX “fear index” rising 150%. This was the index's highest level since the early stages of 2015, and close to those seen at the pinnacle of the Eurozone debt crisis.

Both the S&P 500 and Japan’s NIKKEI index fell by more than 4% overnight while London’s commodity and financials heavy FTSE 100 has dropped more than 5% over the course of the last week.

Vix is now spiking to its highest since the Chinese currency devaluation of 2015 - worse than Brexit referendum, Grexit crisis, anything else in the last 5 years. That looks a tad overdone. pic.twitter.com/f7TfMCQle9

— John Authers (@johnauthers) February 5, 2018

The Dollar received a shot in the arm as a result, displaying a classic safe-haven role while other 'riskier' currencies went lower, with GBP/USD falling below the key 1.40 level.

"For the GBP/USD exchange rate, the near-term outlook has turned from positive to negative. "While we anticipated a lower GBP yesterday, the pace and extent of the drop way exceeded our expectation. The major support levels at 1.4040 and 1.3980 were easily taken out as GBP crashed to an overnight low of 1.3953," says Quek Ser Leang with UOB in Singapore.

Sterling has shed nearly 100 points against the US Dollar during the overnight session Tuesday, making for nearly 200 points worth of losses so far this week, and left the exchange rate trading at a three week low of 1.3940 during the London morning.

The declines in the headline GBP/USD exchange rate spread across to other major Sterling-based pairs such as GBP/EUR.

I've been involved in markets for 55 years. I've seen some real 'sell-offs' like 1987, painful bear markets like https://t.co/AkLnl9Gu8k War 2000-2003 & Credit Crisis 2008/9 but I've never seen such volatility as provided by DJIA in the last 24 hours - Breathtaking volatility!

— David Buik (@truemagic68) February 6, 2018

However, even as stock markets recovered over the course of Tuesday, February 6, the Pound has failed to reverse its losses which tells us that the Pound is in fact a loser under all conditions and is therefore almost certainly taking direction from domestic cues.

“For GBP, the currency remains tainted by the Brexit uncertainty, and with the vulnerable Sterling doing rather well since the beginning of the year, the correction in GBP should not come as a surprise,” notes ING’s Patel, in a note Monday. “Bear in mind, until last Friday, it was the second-best performing G10 currency.”

The ING FX team have been among the most bullish on the Pound-to-Dollar rate so far this year, back in December they forecast Sterling would rise to 1.40 against the US Dollar in the New Year, when it was still trading around 1.3200, which duly happened over the course of January.

However, they have also been calling for further gains in the exchange rate over the rest of 2018, which could have seen the Pound-to-Dollar rise as high as 1.53 by year end. They recently adjusted this target, reducing it to 1.45, but reiterated their call for more gains in a note Tuesday.

“We continue to like GBP/USD upside over the medium-term – with our newly revised target of 1.45 by the end of 2018,” writes Viraj Patel.

“However, even if this week’s Bank of England meeting provides a hawkish tilt (with two rate hike dissenters) and global risk sentiment stabilises, we think any material upside will not be realised until markets have clarity on a Brexit transition deal.”

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