What drove the pound to its lowest level since 1985?

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19 March 2020


Sterling was nursing its bruises this morning following an extraordinary volatile day that saw it crash to its lowest level versus the US dollar since 1985.

he pound fell to a more than 30-year low around the 1.145 mark on Thursday at one stage, a decline of approximately 5%. We outlined our rationale behind the move during our afternoon note yesterday. The main reason for the sell-off continues to be investors scrambling to flock to the safety of the US dollar, seen as the least risky strategy during times of intense market stress. To exacerbate matters, long positions in the currency that were put in place following December’s UK election are now being unwound.

Figure 1: GBP/USD (March 2020)

Rumours flying around the Twittersphere yesterday that the UK could be set to go into lockdown in the coming days also spooked investors. While there has not been an official confirmation from the government, Boris Johnson did allude to this possibility during his daily presser on Wednesday. Unlike many of its European peers, the UK government appears to be taking the Imperial College COVID-19 mitigation strategy, which involves the initial slowing of, rather than necessarily stopping the spread of the virus. That being said, a lockdown does remain likely at some point, which could present a further downside risk to the UK currency.

There was, however, at least some respite from the sell-off this morning, with the pound stabilising around the 1.155 mark versus the dollar and the 1.065 level against the euro. We reiterate, however, that the path of least resistance for sterling is still likely lower.

ECB announces massive stimulus programme

The dollar continued to be the main benefactor from the heightened uncertainty surrounding the virus outbreak on Thursday, extending its seemingly relentless move higher against almost every currency.

News of the European Central Bank’s massive stimulus programme briefly helped support the common currency, although the recovery in EUR/USD was fleeting at best. The ECB announced that it would be launching its so-called Pandemic Emergency Purchase Programme, a €750bn stimulus package aimed at supporting the bloc’s economy during the crisis. This will remain in place until it judges ‘the coronavirus Covid-19 crisis phase is over, but in any case not before the end of the year’.

Stock markets in Europe have, at least, stabilised following the announcement. The package makes amends following Lagarde’s underwhelming performance last week, in which she failed to deliver a rate cut and spooked fixed income traders with her contradictory comments on the ECB’s role in narrowing bond yields. We think that this package should be much more effective in supporting European businesses to meet their debt obligations than a simple rate cut.