Pound-to-Dollar Rate Volatile after Prime Minister Boris Johnson Says He's Got Coronavirus

Above: Boris Johnson. File image. © The Naked Ape. Accessed Flickr, reproduced under Creative Commons licensing.

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The Pound-to-Dollar slumped on Friday, unwinding earlier whopping gains, after Prime Minister Boris Johnson said in a surprise announcement that he has tested positive for coronavirus but will continue to lead the country. 

Pound Sterling was unwinding an earlier sharp gain over the Dollar after Boris Johnson revealed in a Twitter post that he had developed symptoms of the deadly viral pneumonia and since tested positive for it.

The Prime Minister is self-isolating after being notably absent from a press conference on Thursday night. It was later revealed that Health Secretary Matt Hancock has also tested positive for the virus and that Chancellor Rishi Sunak is "working from home." 

"Strange the pound moved a big figure lower on Boris Johnson testing positive for Coronavirus (it's one case). Maybe reality check that confirmed cases are much higher than reported because of lack of testing. But UK lockdown measures are working. Wishing PM a speedy recovery," says Viraj Patel, an FX strategist at Arkera

Above: Pound-to-Dollar rate shown at 15-minute intervals. 

Sterling fell almost 100 points in response to the announcement, taking it back below to the 1.22 handle against the greenback before stabilising. 

This was after a more-than 2% gain in the prior session that had been driven largely by a weakening of the Dollar. 

Johnson and Hancock are the second and third members of the British government to contract the disease, although the infection of ministers and even national leaders is not unprecedented. Iran's health minister contracted the virus at the beginning of the pandemic, Brazlian President Jair Bolsonaro was reported to have had it and a number of U.S. lawmakers have since acquired it. Nonetheless, Friday's disclosure wobbled a still-fragile Sterling.

The Pound has been on a roller coaster ride through a March month that's been marred by extreme volatility in all financial markets as one-by-one, meaningful components of the global economy ground to a standstill as the coronavirus spread increasingly outside China and then Asia. There were more than half a million confirmed cases of the coronavirus across the globe on Friday and nearly 25k fatalities, according to Johns Hopkins University data, which implies a mortality rate of close to 5%. The highly contagious disease has spread indiscriminately between advanced and developing economies. 

"Sterling’s biggest 1-week gains so far are against the USD at 4.8%, JPY at 2.8%, ZAR at 3.4%, CHF at 2.4% and CNH at 4.5%. The pound’s uplift looks fragile though, particular given the deep recession forecast for the UK and increasing national debt taken on to tackle the health and economic crisis of Covid-19,” says George Vessey, a currency strategist at Western Union

Above: Pound-to-Dollar rate shown at daily intervals.

Britain's economy is at a standstill after Prime Minister Johnson instructed that citizens remain in their homes except for in certain limited circumstances as part of a strategy designed to prevent health system from being overloaded and care workers from having to triage patients by deciding who to treat based on who has the best prospects of survivial, as if on a battlefield. 

The Dollar has been the only real beneficiary of the coronavirus crisis engulfing the global economy and all of society, with the Dollar Index up 1% for the month on Friday and 3.26% for 2020 despite steep falls in the last week. The Dollar Index had risen more than 7% over the course of a fortnight in what was a deeply problematic move for the global economy, especially the developing world economies that rely for sustainance on affordable Dollar financing. 

"The sharp reversal of the US dollar yesterday was clear evidence that the deluge of measures from the Federal Reserve to address USD liquidity problems were finally becoming more successful," says Derek Halpenny, head of research, global markets EMEA and international securities at MUFG. "The USD swap lines are playing a role here – indeed EUR and GBP basis have flipped to those currencies being at a premium over the US dollar. Given the euro is a negative yielding currency that is saying a lot."

Above: Pound-to-Dollar rate shown at monthly intervals. Annotated with historic milestones.

The central bank cavalry was quick to appear on the coronavirus battlefield, with the Federal Reserve (Fed) having led the charge by cutting interest rates to the 'zero lower bound,' launching an unlimited program of government bond buying and by extending Dollar swap lines to nine more central banks, taking the total to 15, in a bid to alleviate the impact of unprecedented Dollar demand on the level of U.S. exchange rates. And since then governments have pulled out all of the stops, with no expense spared in an effort to cushion economies.

That Dollar demand had pushed the Pound-to-Dollar rate down to a 1985 low earlier in March amid a global exodus from financial assets like stocks and bonds, including those trading in the City of London, but actions coordinated between central banks and national governments have since and for the time being at least, turned the tide against the runaway Dollar. 

"We suspect that there was a substantial reduction in GBP longs held by leveraged funds in the week through March 24 (GBPUSD fell through 1.15 between March 17 and March 20). But remarkably, prior data on positions held by leveraged funds suggest that many investors were "value hunting" and "buying the dip" in the GBP before the acceleration of GBP depreciation in late-March," says Stephen Gallo, European head of FX strategy at BMO Capital Markets. "The low point for the pair had a 1.14-handle on it, but as USD funding stress has declined in the last few sessions and demand for the USD has waned, the pair has rallied back above 1.20."


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