UK Interest Rates Slashed Again
The pound to US dollar rate mounted a slight recovery yesterday, having plummeted to a fresh multi-year low earlier in the day. The pair, which hadn’t dropped under the 1.15 benchmark since 1985, stabilised thanks to stimulus measures taken by central banks. Safe-haven demand was dampened by the Reserve Bank of Australia and the European Central Bank, which both loosened monetary policy even further. Market turmoil subsequently eased, checking the dollar’s rapid stride slightly, as investors continued to assess the economic risk posed by the coronavirus.
By mid-afternoon, the pound was offered further support by the Bank of England’s (BoE) decision to cut interest rates for the second time in just over a week, bringing the cost of borrowing down to 0.1% from 0.25% – the lowest ever in the BoE’s 325-year history. The central bank’s monetary policymakers voted unanimously for the rate cut and to add £200bn to its quantitative easing programme. The news sent the GBP vs USD rate into recovery mode, causing it to rise back above the 1.16 benchmark.
The dramatic move by new BoE governor Andrew Bailey – who only took over from Mark Carney on Monday – is designed to help businesses and individuals deal with the economic damage the virus has precipitated. The BoE believes “a further package of measures was warranted” adding that “The spread of Covid-19 and the measures being taken to contain the virus will result in an economic shock that could be sharp and large but should be temporary”.
US Manufacturing Sector Feels Weight of Coronavirus Crisis
The Philadelphia Fed manufacturing index for March plunged to its lowest level (-12.7) since June 2012 – a reading below zero indicates worsening conditions. A similar survey conducted by the New York Fed saw sentiment slump to a record low (-21.5). Conditions in the sector deteriorated significantly this month, as manufacturers experience an unprecedented drop in demand and huge supply chain disruptions caused by the coronavirus crisis.
Looking Ahead
Mounting UK government debt in the face of global economic volatility is a major concern for investors in the pound. Today’s public sector net borrowing report will shed light on the situation.
Despite the slight dip in safe-haven demand yesterday, the lingering risk-off mood in markets is expected to keep the dollar on stable ground for the foreseeable future. Unless investors are confident the latest central bank interventions will repel the imminent global growth downturn, safe-haven currencies will remain an attractive bet. However, if the US government delivers the fiscal support it has promised, the dollar could come under pressure.
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