GBP/USD Forecast: Three reasons for the 1,200-pip crash below 1.20, with the bottom out of sight

GBP/USD has tumbled below 1.20 as traders flock to the dollar.
The UK's change in response is weighing on the pound.
The lack of an end in sight is making extreme oversold conditions look irrelevant.

Yohay Elam FXStreet

"We must act like a wartime government" – the words of Prime Minister Boris Johnson as he prepares the UK for significant economic damage as a result of the coronavirus pandemic. His initial policies seem to be part of the reasons for GBP/USD's downfall – now nearing his early days as Prime Minister, when fears of a hard Brexit dominated. That seems to belong to a bygone era.

GBP/USD was close to 1.32 on March 9, and it is nearing 1.19 just 9 days later. It is down over 1,200 pips and counting.

Here are the reasons for the free-fall of the pound, with cable falling to levels last seen in October 2016 – in the flash crash.

1) Dollar demand amid distress

Everything is on sale – a fire sale. The specter of massive layoffs due to paralyzing developed economies is triggered a mass exodus out of stocks and a quick deleveraging of everything else. The dollar is the world's reserve currency and that is where investors flock to.

The US is mulling a stimulus plan worth some $1.2 trillion – including sending a cheque of $1,000 or more to every American – and that reflects the severity of the situation.

The greenback seems to benefit when stocks are rising or falling, and whether yields on US treasuries are up or down.

2) Different British approach

The UK government is moving away from its intention to only isolate vulnerable people and allow the virus to spread elsewhere – the "herd immunity strategy." Its late move to discourage mass gathering is being punished by investors.

The fiscal response – which included substantial expenditure and coordination with the Bank of England – seems minor in comparison to what others are doing. Chancellor Rishi Sunak is now working on a budget worth £350 billion Is that enough? Events are moving fast.

3) No end in sight

While China is gradually lifting its restrictions and attempting to get back to work, the measures imposed by Beijing cannot be fully copied in the West. The number of deaths and infections is rising in Italy, without any hope of seeing light at the end of the tunnel.

For the UK, it is only the beginning of the end, with estimates of major disruptions running from three months to a full year – after the transition period from Brexit ends. The high level of uncertainty is also weighing.

Additional health, lockdown, and stimulus news – that come in at a breakneck pace – are set to rock markets.

GBP/USD Technical Analysis

The daily chart comes in handy amid the fall. The currency pair is down to the lowest since October 2016, when it suffered a flash crash to around 1.19. The Relative Strength Index is well below 30, indicating extreme oversold conditions, but abnormal conditions mean it could continue lower.

Support awaits at 1.1905, followed by 1.18 and 1.17.

Resistance is at 1.1957, the September 2019 low, and then by 1.20 and 1.2120.

More: GBP/USD: Momentum of the sell-off on Cable continues [Video]

Author

Yohay Elam

FXStreet

Yohay is in Forex since 2008 when he founded Forex Crunch, a blog crafted in his free time that turned into a fully-fledged currency website later sold to Finixio.

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