Pound, equities drop but downside could be limited

Risk appetite turned sour overnight, and the selling gathered pace when European markets started trading this morning amid renewed concerns over the pandemic. A full UK border closure is being 'considered' by the government, according to Environment Secretary George Eustice. This is due to concerns about new COVID variants being imported from abroad. Restrictions have also intensified in Germany, Hong Hong and several other countries, with experts warning that the situation could get worse before things get better.

So, the FTSE and other European indices dipped at the open, as too did the pound, crude oil, copper and other risk-sensitive assets.

Still, it wasn’t a full-on panic selling as investors remained cautiously optimistic amid the prospect of additional stimulus as well as hopes that the vaccine rollout will gather pace, and lockdowns will eventually end.

Concerns over a full UK boarder closure and with COVID deaths hitting new records on a daily basis, investors in the pound had little choice but to take profit after the currency’s recent run of good form. However, the downside could be limited as a no-deal Brexit has been avoided and with the UK being ahead of many countries in rolling out the vaccines, the economy could re-open quicker and growth could rebound as confidence slowly returns. This might not happen until at least the start of Q2, but the markets being forward-looking, the latest dip in the pound could be bought.

For as long as the cable holds its own inside its bullish channel, the path of least resistance would remain to the upside. The most recent significant low was made at 1.3450ish. This level is now the line in the sand. If it breaks, then the bullish bias would become invalid. While this hold, I will continue to maintain a bullish view on the GBP/USD and still think 1.40 is achievable, potentially in the next few weeks.