The Pound is on the decline again on Thursday, after plunging to its lowest level in 35 years on Wednesday. The Pound versus US Dollar exchange rate dived to a low of US$1.1466, before closing the session -3.6% at US$1.1608. As investors rushed to sell out of sterling and rotation into the mighty dollar continued.
At 07:30 UTC, GBP/USD is once again on the back foot -1% at US$1.1500.
London Lock Down Looms
There is rarely one factor which causes such an enormous sell off in a currency, such as that of the Pound on Wednesday. However, the UK government’s blasé “herd immunity” strategy for dealing with coronavirus has certainly played a major role. The number of coronavirus death jumped 55% in one day to 105, whilst 700 new cases of the virus have been reported in the past 24 hours.
This caused a sharp U-turn by the government which said schools will close on Friday and more importantly London, the largest hub of foreign exchange trading, could be on lock down as soon as this weekend.
Weakening fundamentals will keep the Pound under pressure. The stricter measures which are about to be implemented in London will result in a large demand shock on the UK economy. A recession in inevitable despite the Chancellor’s £330 billion bailout package.
US Dollar Boosted By Funding Squeeze
The collapse in cable (Pound US Dollar exchange rate has been exasperated by a dollar liquidity squeeze. This is when financial institutions grow concerned over the short-term availability of money, in this case dollars. As a result, the banks are more reluctant to lend money on the interbank market.
The economic stress as a result of the dollar squeeze is spreading resulting in higher demand for the safe haven dollar. The dollar squeeze has exposed risks created by a more than doubling in dollar dominated corporate debt since 2008, to $12 trillion.
This rise of the dollar comes despite the US Federal reserve pumping billions of dollars into the system. The Fed added, yesterday evening that it would offer emergency aid to money market funds. President Trump also resigned a relief package to help Americans affected by the pandemic
