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GBP/USD: As cable test 1985 lows, more downside ahead?

GBP/USD continues to suffer today, changing hands below $1.19, at lows not seen since 1985. What’s driving the weakness and where next for cable?

Pound and US dollar Source: Bloomberg

GBP/USD hits lows not seen since 1985

GBP/USD continues to suffer today, changing hands below $1.19, at lows not seen since 1985. Back in February 1985, cable dropped all the way down to $1.05, driven mainly by US dollar strength, after it appreciated by 26% between 1980 and 1984. The then US President, Ronald Reagan, brought about a series of fiscal stimulus measures, pushing up long-term interest rates and in turn the value of the greenback.

This time, cable’s weakness has been driven by economic worries amid the fall-out from COVID-19. Today is the seventh day in a row of falls for the pound, despite the Bank of England (BoE) slashing interest rates to just 0.25% last Wednesday and the announcement of a major spending plan from UK chancellor Rishi Sunak amounting to £350 billion.

The UK economy was already on shaky ground with uncertainties around Brexit and a huge current account deficit. And now many UK businesses are at risk, especially in the travel and retail sectors. The Association of British Insurers (ABI) warned that the ‘vast majority’ of UK businesses are not covered for coronavirus shutdown. Plus, with airlines facing dramatic cuts to services, reduced capacity and grounded flights, there are increasing calls for a government-led bailout of the whole industry. The CAPA Centre for Aviation, a consultancy, has warned that most airlines are likely to face ‘technical bankruptcy’ by the end of May.

New Bank of England governor tries to calm markets

The BoE governor, Andrew Bailey, who only took up the role on Monday, has tried to dispel market concerns today, pledging to do what is needed to help the economy. Speaking in a conference call from Threadneedle Street he said, ‘This is going to involve a lot of work. We will, no question, have to come back to this because things will evolve.’

‘We are facing an emergency. I didn’t think that three days into the job I would be sitting in a virtually empty building. But we are ready to do whatever we have to do.’

He also said he has no ‘single story’ on the latest sterling fall. Meanwhile, according to Sky News, a ‘radical’ money printing plan is being considered by the BoE.

Since last Monday GBP/USD has shed about 10% of its value, respecting a clear-cut descending channel with a series of lower lows and lower highs since the depreciation started to accelerate nine days ago. The RSI indicator has remained below 30 for a prolonged period which is an indication of a strong downtrend.

GBP/USD: key level to watch

In terms of key levels, look out for the psychological round number $1.18 on the downside for support and $1.1958 for resistance, which was the low from September of last year. That level was support and has now turned into resistance. A push above would be needed in order to start to negate the bearish momentum.

GBP/USD chart Source: IG charts
GBP/USD chart Source: IG charts

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