- Pound Sterling trades sideways ahead of US, UK central banks’ policy decisions.
- The BoE and the Fed are expected to keep interest rates steady.
- BoE policymakers are expected to offer hawkish guidance amid higher inflation.
The Pound Sterling (GBP) remains lackluster in Monday’s European session as investors appear to have sidelined ahead of the interest rate announcements by the Bank of England (BoE) and the Federal Reserve (Fed). The GBP/USD pair trades in a narrow range near 1.2700 as investors are anticipated to make their bets after this week’s policy announcements.
Trades see the BoE maintaining interest rates unchanged at 5.25% for the fourth time in a row as core inflation in the United Kingdom more than doubles the desired rate of 2%. Market participants will keenly focus on the interest rate outlook provided by the central bank.
The first interest rate decision of 2024 is expected to be challenging for BoE policymakers as inflation has proven to be more stubborn than expected and a technical recession is increasingly likely. Consumer spending has been hit hard due to the deepening cost-of-living crisis. Chances of a recession would escalate if the BoE delivers a hawkish guidance.
Daily digest market movers: Pound Sterling consolidates while safe-haven bet improves
- The Pound Sterling is stuck in a tight range around 1.2700 as investors shift their focus towards the monetary policy announcements by the Federal Reserve and the Bank of England, which are due this week.
- The BoE is widely anticipated to keep interest rates unchanged amid persistent price pressures.
- Interest rates are expected to remain steady at 5.25% for the fourth time in a row. Investors will keenly focus on the guidance on interest rates.
- Unlike the Fed and the European Central Bank (ECB), BoE policymakers have not talked about the timing or scope of rate cuts yet.
- Underlying inflation in the United Kingdom is higher than in the rest of the Group of Seven economies. This will likely allow BoE policymakers to deliver hawkish guidance on the interest rate outlook.
- Discussions among BoE officials will likely remain supportive of keeping interest rates restrictive until policymakers get confident that inflation will return to the 2% target in a sustainable manner.
- BoE policymakers have said rate cuts at the current stage would be “premature” as they could lead to a rebound in price pressures.
- Meanwhile, the US Dollar Index (DXY) strengthens ahead of the Fed’s monetary policy decision and key data such as employment and Manufacturing PMI for January.
- Investors see the Fed maintaining the status-quo for a fourth straight time. The entire focus will be on the timing of when the Fed will start reducing interest rates.
- Fed officials projected a reduction in interest rates by 75 basis points (bps) in 2024. Market participants will focus on how the Fed will fit these three expected rate cuts from or after the March monetary policy meeting.
- Before the Fed’s policy decision, market participants will focus on the JOLTS Job Openings data for December. US employers are expected to have offered 8.75 million jobs in December, slightly lower from the 8.79 million job postings recorded in November.
Technical Analysis: Pound Sterling struggles to sustain above 1.2700
Pound Sterling trades back and forth near 1.2700 ahead of the key monetary policy announcements on both sides of the Atlantic. The GBP/USD pair oscillates inside Friday’s trading range of 1.2675-1.2758, indicating a sharp contraction in volatility. On a daily timeframe, the Cable demonstrates a long inventory adjustment between retail participants and institutional investors. The 20-day Exponential Moving Average (EMA) near 1.2700 overlaps the Cable’s current trading range, adding to evidence that investors have sidelined ahead of the data-packed week.
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off” refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.
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