Pound crashes to weakest level since 1985, surpassing Brexit lows

LONDON: The pound fell to its lowest level against the dollar in over three decades as the shocks caused by the coronavirus rippled through global markets.

Investors fled from UK assets as the pandemic began spreading through Britain, with many fearing Prime Minister Boris Johnson’s response has fallen short compared to measures taken by other European nations.

Sterling has also suffered due to heightened global demand for the greenback, with a gauge of dollar strength up for a seventh session.

“A combination of the safe-haven dollar bid, the global asset sell-off and liquidation of long positions from the election are all weighing on the pound,” said Neil Jones, head of foreign-exchange sales to financial institutions at Mizuho Bank Ltd.

Sterling fell as much as 2.5% to US$1.1758, surpassing even the lows it recorded in the aftermath of the 2016 Brexit vote. It was last lower in 1985, when the world’s richest nations signed the Plaza Accord to weaken the dollar and haul the US economy out of a recession.

Governor watching

New Bank of England Governor Andrew Bailey commented on sterling’s downward slump during a call with reporters Wednesday, where he said the BOE can do more to minimise the economic impact of the coronavirus in concert with the Treasury.

“We watch it very carefully,” he said. “I don’t have a particular single story as to why what’s happening is happening. We’ve got a Monetary Policy Committee meeting next week. We will take it into consideration, consider carefully what the effects will be.”

Alongside the pound, UK sovereign bonds plummeted after the government announced a rescue package for businesses in an attempt to stop the coronavirus wrecking the domestic economy.

The yield on 10-year UK bonds rose to their highest in over two months, while the FTSE 100 stock index dropped as much as 5.5%.

“The UK has a co-ordinated monetary and fiscal policy approach but the size of the package is still being deemed by markets as insufficient,” said Hetal Mehta, senior European economist at Legal & General Investment Management.

“A new BOE governor only three days into the job whose monetary policy views are still largely unknown will also cause some nervousness.”

Banks have been wrongfooted after being bullish on sterling, with a median estimate compiled by Bloomberg forecasting the pound at US$1.30 by June.

Option markets indicate a less optimistic picture, with traders going from neutral on its prospects to the most bearish since the December election, prompting analysts to revise projections of where the pound can go next.

“It’s lower, potentially the US$1.15-US$1.18 range but there is a strong set of reasons why it can do more than that,” said Jordan Rochester, strategist at Nomura International Plc, citing how the coronavirus impact on the British economy is still not fully being felt.

“The UK’s service surplus is likely to have collapsed given reduced business and the UK being in a stockpiling mode, in a similar way to the first hard Brexit deadline.”