The Bottom Drops Out as GBP/USD Hits 35-Year Lows
Matt Weller, CFA, CMT March 18, 2020 6:02 PM
While global stock markets have melted down and global bond markets have melted up (and now back down again) over the last couple weeks, the world’s largest market had been relatively insulated from the massive volatility impacting other traders.
That ended today.
The FX market is seeing some of its biggest moves in years across a swath of different currencies, but there’s no pair more interesting right now than GBP/USD. At the start of last week (a lifetime ago in the coronavirus time), the pair was trading above 1.30, near the top of its 20-month range. Since then, rates have absolutely imploded, with the pair falling to trade below 1.1500 earlier today, the culmination (so far) of a nearly 600-pip peak-to-trough collapse today alone.
Source: TradingView, GAIN Capital
As of writing, the pair is trading at its lowest level since the mid-1980s! For the market historians following along at home, GBP/USD’s post-gold-standard low sits about 1,000 pips lower near 1.05.
The. Bottom. Dropped. Out.
So what drove cable to these historic lows, and is it likely to continue?
As always with markets, there was no single factor driving millions of traders’ in unison, but UK policymakers’ blasé “herd immunity” strategy for dealing with coronavirus certainly paid a major role, as have rumors that London will be shut down imminently to slow the outbreak of the disease. In the UK, more than 700 new cases of coronavirus have been reported in just the last 24 hours, bringing the total number of infections above 2,600; over 100 UK citizens have died.
Though those headlines are alarming, they’re not enough alone to explain cable’s incredible collapse over the last couple weeks. The move has been exacerbated by funding squeeze in the US dollar, which has been the only major asset to appreciate meaningfully through the crisis, with correlations in other major markets rising toward 1.
With regard to GBP/USD, one of the earliest lessons many traders learn is to “never catch a falling knife.” The strength of the current selling pressure is overwhelming any semblance of buying, and with no support levels from the past 35 years nearby, there’s no logical place for bulls to regroup. That said, cable is deeply oversold will form at least a near-term bottom at some point; it’s difficult to handicap a more likely area for such a reversal than usual.
At this point, readers looking to pick a bottom (or shorts planning on booking profits) may want to drill down to a smaller timeframe chart, such as the 1-hour chart, and look for candlestick reversal patterns or divergences in momentum oscillators to set up short-term trades with strong risk/reward ratios. Longer term, the bearish bias will remain intact as long as rates remain below key psychological support-turned-resistance at 1.20.
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.