- Pound Sterling faces some pressure as the S&P Global UK Manufacturing PMI data remains below consensus.
- UK factory activities remained due to subdued demand from domestic economy and exports markets
- The BoE may start reducing interest rates earlier due to deepening recession fears.
The Pound Sterling (GBP) faces a sharp sell-off after the release of the weaker-than-projected S&P Global Manufacturing PMI for December. The factory data remained lower at 46.2 than expectations and the former reading of 46.4. The economic data below the 50.0 threshold indicates contraction in economic activities. The Manufacturing PMI remains below the 50.0 threshold for the 17-month in a row.
S&P Global commented that “UK manufacturing output contracted at an increased rate at the end of 2023. The demand backdrop also remains frosty, with new orders sinking further as conditions remain tough in both the domestic market and in key export markets, notably the EU. The downturn has hit manufacturers’ confidence, which dipped to its lowest level in a year, and encouraged renewed cost caution with further cutbacks to stock levels, purchasing and employment.
Major action in the Pound Sterling would come from investor speculation regarding the timing of possible rate cuts by the Bank of England (BoE). Market participants currently expect the BoE to start cutting interest rates from May given the United Kingdom economy is exposed to a technical recession. BoE policymakers have been refraining themselves from endorsing interest rate-cut up until now but a likely recession could force them to start discussions about reducing interest rates.
Daily Digest Market Movers: Pound Sterling falls sharply as market mood dampens
- Pound Sterling drops vertically as the United Kingdom’s S&P Global Manufacturing PMI for December failed to match expectations as higher interest rates by the Bank of England and underlying price pressures have narrowed pockets of households.
- The economic data drops to 46.2 as higher interest rates and deepening cost of living crisis hurt demand from the domestic and the overseas market.
- The outlook for the UK manufacturing sector is expected to remain gloomy but suppliers may be forced to offer raw-materials at lower prices, which will ease price pressures.
- Broadly, the Pound Sterling has performed well against the US Dollar as the appeal of risk-perceived assets remain upbeat.
- However, the strength in the Pound Sterling could be hampered as the UK is at risk of a technical recession.
- As per the latest estimates from the UK Office for National Statistics (ONS), the UK economy shrank by 0.1% in the third quarter of 2023.
- The BoE is not expecting any growth in the final quarter of 2023. If the UK economy contracts in the October-December period, it will signal a technical recession (two consecutive quarters of negative growth).
- Contrary to UK ONS GDP data, Finance Minister Jeremy Hunt said that the outlook of the economy is not as bad as the data suggested.
- The case of a recession in the UK economy would compel BoE policymakers to consider rate cuts earlier than previously projected.
- Market participants hope that the BoE may start reducing interest rates from May from a previously projected August.
- Later this week, investors will focus on the S&P Global Services PMI data for December, which will be published on Thursday. The economic data is seen steady at 52.7.
- On the US Dollar front, the US Dollar Index (DXY) recovers further to near 101.50 as investors shift focus towards the ISM Manufacturing and Services PMI and labour market data, which will be published this week.
- The broader appeal of the US Dollar is bearish as market participants hope that the Federal Reserve (Fed) will be the first among the Group of Seven economies, to start a rate-cut campaign.
- Investors see the Fed reducing interest rates by 25 basis points (bps) to 5.00-5.25% from March and one more rate cut is anticipated in May.
Technical Analysis: Pound Sterling falls to near 1.2640
Pound Sterling falls vertically after a consolidation breakdown to near 1.2640 as the risk-appetite of investors fades significantly. Investors await the US labour market and PMIs for furtehr action.
On a daily time frame, the GBP/USD pair continues to stay above the 20-day Exponential Moving Average (EMA), which indicates that near-term demand is bullish. Momentum oscillators struggle to sustain in the bearish trajectory.
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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