Sterling volatility increased rapidly yesterday as global financial markets suffered a panic induced meltdown. Any Pound positivity generated by the Bank of England’s rate cut and spending pledges were overwhelmed by wider risk aversion and global economic fears amid a raft of profit warnings.The FTSE 100 index closed nearly 10% down on the day, the sharpest 1-day decline since Black Wednesday, which reinforced underlying currency vulnerability.
The Pound dropped below 1.1235 against the Euro before correcting to near 1.1286, and also plummeted to 5-month lows just below 1.2500 on the Dollar when the UK government avoided aggressive coronavirus action. At market open the Euro was trading just above 1.1235 and the Pound was drifting up against the Dollar to reach 1.2575 at the bell.
Overall confidence in the US outlook continued to deteriorate with fears over a major coronavirus outbreak and extensive damage to the economy. Futures indicated more than a 85% chance of a full 1% Federal Reserve rate cut next week.
Market volatility increased sharply with evidence of a major dollar shortage as international banks scrambled to meet US currency demand. In this environment, the dollar moved sharply higher across all major currencies despite an adverse move in yields. The currency index moved sharply higher with a gain of over 2.5% of the day with Euro lows near 1.1050.
The New York Federal Reserve (Fed) offered up to $500bn in a 3-month repo operation which helped alleviate the dollar shortage and the US currency retreated from its best levels.
Volatility eased only slightly this morning with the Euro trading around 1.1200 and there will be another aggressive Fed liquidity injection, but with a high risk of further very sharp swings during the day.
The ECB made no changes to interest rates keeping it at 0.0% and the deposit rate at -0.50%. Market expectations were for a 10 basis points in the deposit rate at the least. It did announce additional bond purchases of EUR120bn for the remainder of 2020 and will provide additional cheap funding to the banking sector to help credit flows to the business sector. Markets were disappointed at the lack of rate cut and fears over the economic outlook increased sharply as coronavirus cases increased rapidly. Although the Euro briefly made gains, it weakened sharply during President Lagarde’s press conference, especially after her apparent lack of concern over Italian yield spreads also unsettled sentiment.
As of writing, the Euro is trading just below the 1.12 level against the Dollar.
Data to watch
14:00 – USD – Prelim UoM Consumer Sentiment