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Sterling slumps on emergency rate cut

GBP - British Pound

The pound dropped across the board this morning as the Bank of England announced an emergency interest rate cut in an effort to shore up the economy in the face of the coronavirus outbreak. Bank rate was reduced from 0.75% to 0.25% taking the markets off guard and raising the likelihood we could see another reduction to all time lows at the scheduled monetary policy meeting on March 26th. Markets were expecting the cut to take place on the 26th however this early move saw GBP/USD drop to 1.2830 before paring its losses. Recent comments from incoming Bank of England Governor, Andrew Bailey that rates could be taken as low as 0.1% means further easing is a real possibility in a couple of weeks time. As well as cutting rates the Bank has relaxed rules over what funds high street lenders are meant to keep aside as a buffer as well as introducing a new "Term Funding Scheme" which will offer cheap loans to banks to ensure liquidity doesn't run dry should Covid-19 sweep the nation.

Later today sees the budget from new Chancellor of the Exchequer, Rishi Sunak which despite the coronavirus outbreak, is expected to unveil a huge spending initiative with the government ploughing money into infrastructure projects in an effort to promote growth. These are hugely uncertain times for a UK economy already hampered by UK/EU talk headwinds however it seems Boris Johnson and chief advisor Dominic Cummings are determined, in collaboration with Sunak, to spend its way out of any potential economic downturn. Aiding the government is the fact that the cost of issuing debt is at an all time low with the yield on some shorter dated Gilts actually turning negative for the first time ever on Monday.

Sterling has pared some of its losses with GBP/USD back up to 1.2945 and GBP/EUR at 1.1440.

Key Movers

Italy remains in lock-down at present as over 10k people are now known to have been infected with the coronavirus. Worryingly the number of people who have died is 631 according to official figures meaning a mortality rate of over 6%. As confirmed yesterday all top flight football matches have been cancelled and citizens being asked to stay at home in an effort to contain the outbreak. Italian deputy economy minister has announced that mortgage payments for individuals and small business' will be suspended in an effort to soften the blow of the outbreak.

European Central Bank chief, Christine Lagarde is reported to have told European leaders in a conference call that fiscal stimulus is needed to support the Eurozone in the face of a potential coronavirus driven recession. The central bank has limited room for manoeuvre given rates are already at zero for lending and -0.5% for deposits so it seems Lagarde is asking for action from EZ members to fight a downturn which is viewed as potentially as severe as the global economic crisis of 2008.

After some brief respite yesterday all major stock markets are back in the red with risk assets being shunned. USD/JPY is up to 105.1 after looking like it could drop below 101 on Monday highlighting the severity of Monday's panic however it seems likely further gains for JPY, CHF and gold are on the cards as wider disruption is felt across the globe.

Away from the coronavirus, it looks like Donald Trump will contest for Vice-President, Joe Biden for the 2020 presidential election in November after Biden leapt ahead of main rival Bernie Sanders in Tuesday's latest round of primaries. Trumps handling of the coronavirus could now be key to how the election plays out. EUR/USD trades at 1.1310.

Expected Ranges

GBP/USD: 1.2850 - 1.3050 ▼

GBP/EUR: 1.1375 - 1.1520 ▼

GBP/AUD: 1.9765 - 1.9980 ▼

GBP/NZD: 2.04 - 2.0610 ▼

GBP/CAD: 1.7765 - 1.7925 ▼