FX.co ★ Reasons for recent collapse in GBP

Daily chart of GBP/USD:

According to the daily chart, the pound was on a losing streak in the past two days.

Between September 23 and September 26, the sterling plunged to 1.0360 from 1.1280 and then retraced up to 1.0620.

Overall, the pound saw a decline of 900 pips (about 8%).

Reasons behind the plunge

The fall came after the UK government announced large-scale 100 million fiscal support for the British economy. In fact, this is a rather risky strategy. UK government bonds tumbled in price following the announcement. Understanding that huge new borrowings would trigger a drop in bonds, spooked investors sold them and flew out of the pound, prompting a collapse.

Deutsche Bank experts suggest that in an attempt to stabilize the pound, the Bank of England could raise the interest rate sharply at an emergency meeting in the coming days. The sterling is forecast to fall to parity with the US dollar.

In my view, right now it would be unwise to sell or buy GBP. Still, long positions could be considered if the price again hits its lows.