The story of the British Pound during the last couple years is a great reminder of how obsessing over one specific anxiety in life can be a huge waste of time, and counterproductive – especially because new problems can pop up at any time which can render that old problem merely an afterthought.
Case in point, anxieties over Brexit, or the exit of the United Kingdom (UK) from the European Union (EU), had been plaguing the global investment community for much of the last few years.
It was these concerns that sent the British Pound on a downward sloping rollercoaster due to worries that the United Kingdom’s economy would enter the “great unknown” when decoupling from the European Union.
Prior to the UK’s decision to exit the European Union in 2016, the GBP to USD exchange rate had consistently traded above 1.50—and much of the time well above it.
But as the uncoupling of Britain from the EU got more and more complicated, volatility in the Pound trended higher, and the currency ultimately dropped to as low as 1.20 versus the dollar late last summer.
Interestingly, the actual “Brexit” event, which occurred in January of 2020, turned out to be much less dramatic than anticipated—a bit like how concerns over a visit to the doctor’s office can often be worse than the exam itself.
So after years of heightened anxiety, the British Pound actually rallied into the completion of Brexit (January 2020), and began 2020 trading at the higher end of its recent range – around 1.30.
It was only a month a half later, when anxieties over the Pound were dissipating, that the aforementioned life lesson was delivered.
The arrival of the coronavirus.
On March 18, in the heat of the “coronacrisis,” the Pound plummeted to its lowest level since 1985 – approximately 1.15, as shown in the price chart below (GBP/USD exchange rate):
So after years of worrying about the impact of Brexit on the value of the Pound, it was a completely unrelated event that served to be its undoing. On March 18, with the coronavirus raging in Europe, the Pound lost over 4% in a single day.
To put the current level in better perspective, consider that over the last 36 years, the Pound has only four times closed a calendar year trading less than 1.30 (US dollars per British Pound), including:
- 2019: 1.27
- 2018: 1.27
- 2016: 1.23
- 1984: 1.16
Right now, there’s every reason to believe the fifth instance will be recorded at the conclusion of 2020.
Of course, that will largely depend on the ultimate impact of the coronavirus in Britain and the rest of the world.
Like many other nations around the globe, central bankers in the UK have cut rates and started asset buying programs, and are considering stimulus measures to help assist the economy during these troubling times.
Only time will tell if those measures will serve to boost the value of the Pound.
But with the Pound trading at such an extreme level, traders may want to monitor its movement closely in the coming weeks. The Pound will likely serve as an important barometer for the strength of the potential recovery in the UK, as well as the rest of the world.
As a reminder, /6B is the futures ticker for the British Pound-to-US Dollar exchange rate. Alternatively, traders can reference the ETF ticker FXB (Invesco CurrencyShares British Pound Sterling Trust) to monitor movement in the Pound.
After the big rally in global markets on March 24, the Pound was able to claw back to 1.18, illustrating that plenty of contrarians were on hand when the Pound hit such extreme lows.
Whether that level holds is anyone’s guess. An intensification of the coronacrisis in the UK could put the 1.15 level under pressure again soon. But the fact that the London Underground metro system was still flooded with rush hour commuters as recently as March 24 suggests that the depths of the crisis in the UK are ahead, not behind.
For more context on trading the British Pound, and other foreign currencies, readers can review a previous installment of Futures Measures on the tastytrade financial network when scheduling allows.