GBP/USD backs off from highs due to higher market volatility, Fed emergency cut

• GBP/USD rallied on dollar weakness due to Fed emergency rate cut.
• Market volatility spikes and cable runs up and down in the 1.28 handle. 
• BoE is now in focus as central banks align with RBA and Fed first out of the blocks to battle coronavirus. 

GBP/USD is trading at 1.2826 at the time of writing, up some 0.6% having climbed from a low of 1.2739 to a high of 1.2843 following today’s emergency 50 basis point cut from the Federal Reserve. In an emergency meeting, the Fed cut interest rates and left the door wide open for more at the 18th March meeting, sending the DXY to fresh daily lows of 96.98. Fed’s chair, Jerome Powell, said at the start of the press conference that the “outbreak has prompted significant moves in financial markets.” Powell added, “In the weeks and months ahead we will continue to closely monitor developments and will act appropriately to support the economy.” 

As one would expect, US yields continue to plummet and the Fed funds rate is now in the 1-1.25% range but 2-year yields have fallen by 13 basis points to 0.774%, suggesting more is coming. Wall Street sees it too. Following an initial spike, the S&P 500 is back into negative territory. The coronavirus is evidently troubling investors and gold is back to the point of control of the recent range of control a $1,645.

BoE to follow in the footsteps of the Fed?

It is now likely that the central banks of major developed markets (DMs) will follow Australia and the US in loosening monetary policy to help their economies weather the impact of the coronavirus. Four Monetary Policy Committee members appeared before the Treasury Select Committee and noted that forecasts were likely to be updated on account of COVID-19 effects. The Governor of the Old Lady, Marck Carney, released a statement saying that the Bank of England “will take all necessary steps”. While he suggested that the MPC could wait until their late-March meeting to react to developments, he noted he didn’t want to bind the MPC to any specific timing. 

However, there is a limit to what rate cuts can achieve; more effective will be the targeted fiscal measures that are on their way too. On the 11th March, the UK Chancellor is expected to announce extra tax breaks and support for the NHS, although emergency contingency funding for a coronavirus epidemic could mean that the Chancellor will have less wiggle room for next Wednesday’s budget. 

One factor that the BoE will also need to consider is how the pent up demand in the UK following the UK elections and Brexit uncertainty could positively impact sterling markets.  For instance, the construction PMI surged in February to 52.6, its highest level since late-2018, as new orders rose by the most since late-2015.  

G7 leaves door open to rate cuts, but no promises

Meanwhile, the G7 statement fell short of hopes of a coordinated policy response and markets were disappointed on the statement that G7 countries are committed to “use all appropriate policy tools to achieve strong, sustainable growth and safeguard against downside risks” and that central banks will “continue to fulfil their mandates, thus supporting price stability and economic growth while maintaining the resilience of the financial system”. 

GBP/USD levels