26.03.202009:57 Forex Analysis & Reviews: Pound, Brexit, and COVID-19

According to some experts, the British currency again threatened to be an outsider. This is facilitated by a number of factors, including the instability of the British economy since the time of Brexit and the outbreak of the coronavirus pandemic.

On Wednesday, March 25, after a recent rise, the pound began to decline rapidly. The GBP / USD currency pair slid from the fixed daily maximum of 1.1740, and went to low values. Sterling dropped by more than 150 points, moving to the level of 1.1800. Morning of March 26, the pound was still in this range, trading at 1.1845–1.1850, subsequently, the tandem rose to 1.1868–1.1870.

According to experts, forecasts regarding a sharp drop in the consumer activity in the country put pressure on the pound. Experts fear the plunge of both the British and the global economy into recession. The measures taken by the UK authorities, in particular the three-week quarantine, will have an extremely negative impact on consumer spending and economic activity in general. According to analysts, for 50% –90% of the world's population, three-week quarantine will lead to a noticeable reduction in consumption by 5% –8%, and if it increases to six weeks, it will lead to a decrease in spending by 9% –16%.

Experts seriously fear that a slowdown in British consumer activity along with a rapid collapse in oil prices will stop the inflation pressures in the country. According to current data on the consumer price index in the UK, in February 2020 the annual inflation rate in the country slowed down to 1.7%, which is lower than the January figure of 1.8%.

Economists believe that the high risk of a further reduction in inflation may force the Bank of England to revise the current monetary policy and move to additional measures to mitigate it. Recall that last week, the Committee on Monetary Policy of the country reduced the key rate by 15 basis points, from 0.25% to 0.10%. According to experts, this is a record low. At the same time, the Bank of England initiated the expansion of the bond purchase program to 645 billion pounds. Today, March 26, another meeting of the regulator is expected, at which fundamental issues will be considered, including a decision on the basic interest rate, the planned volume of asset purchases, and also problems of monetary policy.

The current situation has a contradictory effect on the dynamics of the pound. On the one hand, it is under the pressure of these factors and periodically decreases. Experts fear that with the introduction of additional incentive measures of the "bearish" sterling rally, which began on Wednesday, will gain momentum again.

On the other hand, thanks to the relatively positive February report on inflation in the UK, the pound was able to temporarily strengthen its position in relation to the greenback. According to current information, the last month CPI in the country grew by 0.4% per month and by 1.7% year on year. The basic consumer price index did not disappoint analysts, which showed an increase of 0.6% in February and 1.7% per year. The data largely coincided with the forecasts of specialists. This gives some hope for a further economic recovery, although in general the situation is far from favorable.

The precarious economic balance in Great Britain does not allow the pound to achieve balance and rise to new heights. On Wednesday, the bulls on GBP tried to continue the upward correction, however, these attempts were unsuccessful. The result was the next sale of the pound, and the pair was again almost at the margins of the financial market. According to analysts, the pressure on sterling is still great, and it is becoming increasingly difficult to resist it.

Experts said that the British currency, despite being an outsider, will definitely try to rise up and strengthen its position. Adding that it is not going to give up without a fight. They expect a slight strengthening of the pound, but only in the long term.