Jason Heppenstall

Pound sinks as Bank of England hints at rate cut


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The Pound spent much of the month of February climbing on currency markets as traders generally sought out safe haven in reaction to the coronavirus scare centred on China. This, however, came to a crashing halt at the beginning of this month when the Bank of England (BoE) hinted that UK interest rates may need to be cut.

While the BoE had opted to keep interest rates steady at 0.75% at the end of January, it was only a month before talk surfaced of cutting them to help struggling businesses.

This saw Sterling immediately relinquish the gains it had made against the US Dollar and the Euro over February. Bolstering the odds that the Bank would choose to slash rates was a surprise 0.5% rate cut by the US Federal Reserve, halting any further falls for the Pound.

FEARS OF CORONAVIRUS CONTAGION BOOST US DOLLAR

The US Dollar has been the currency which has shown the most resilience in the face of the spread of the virus.

A global stock market meltdown at the end of February saw fear levels spike, and we immediately saw traders snapping up safe US bonds, which had the effect of strengthening the US Dollar.

Adding to the Dollar’s strength were some optimistic noises coming from the Federal Reserve, which kept the currency appealing across the board, with the GBP/USD currency pairing sinking from a high of $1.30 down to $1.28.

An emergency interest rate cut of 0.5% by the Federal Reserve on March 3 put a stop to the rising US Dollar. The rate cut, according to Fed Chair Jerome Powell, was to provide economic support in the face of the coronavirus impact.

Elsewhere in North America, the Pound has been up and down against the Canadian Dollar over February, with GBP/CAD rising to CA$1.73 as the oil price continued to plummet due to decreased demand across Asia. By the start of March it had fallen back again to around CA$1.71.

AUSTRALIAN DOLLAR GETS A SHOT IN THE ARM FROM RATE CUT

The Australian Dollar has been having a tough time of it due to slumping demand for commodities from China – Australia’s biggest trading partner – seriously denting AUD exchange rates.

The Reserve Bank of Australia threw out a lifeline on Tuesday March 3, slashing interest rates to 0.5%.

While cutting interest rates would normally weaken a currency (traders don’t want to park their money in a currency that offers low interest) in this case it had the reverse effect, causing the ‘Aussie’ to jump.

It remains to be seen how long this good cheer will last, however, meaning the broader outlook for the GBP/AUD exchange rate remains positive.

EURO MIXED AS INVESTORS HESITANT OVER VIRUS FEARS

With the Euro being the world’s second strongest currency, a number of factors have impacted it over the last month, causing it to weaken and then strengthen against the US Dollar and others.

One of the main weakening factors was of course the coronavirus outbreak, with the appearance of a cluster of infections in northern Italy spooking traders.

The fear is that if Italy suffers much economic damage from the virus, its banks will need to be bailed out by the European Central Bank (ECB), which will cause political problems in the currency bloc.

However, over the latter half of February these fears were outweighed by positive factors, the strongest being the ECB – unlike other central banks – saying it did not have any plans to cut interest rates (which are already at 0%).

The result of all this is that the EUR/USD exchange rate rose from a low of $1.08 to $1.12 by the start of March.

Meanwhile, more tough talk from the UK and the EU over Brexit negotiations continued to impact the Pound, with GBP/EUR falling back to €1.15 at the time of writing.

WHAT TO LOOK OUT FOR IN MARCH

The key factor driving the Pound at the moment is the likelihood of a rate cut from the Bank of England to deal with any fallout from the spread of coronavirus. What’s more, the budget on March 11 will give traders something to focus on, with all eyes on new chancellor Rishi Sunak, who is expected to be bold in his policy announcements.

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