- Pound Sterling remains under pressure as the Fed’s hopes for an early rate-cut wane.
- The UK’s poor economic prospects could force the BoE to lean towards loosening policy.
- The S&P Global Services PMI came out better than expectations.
The Pound Sterling (GBP) continues to face the wrath of dismal market sentiment in the European session on Monday. The GBP/USD pair drops sharply as resilient United States Nonfarm Payrolls (NFP) data on Friday have dented expectations of a rate cut from the Federal Reserve (Fed) at March’s monetary policy meeting. The solid US job creation data came together with an unexpectedly robust wage growth, signaling that inflation pressures persist.
Meanwhile, the scenario for Bank of England (BoE) policymakers is becoming extremely complicated due to deepening fears of a technical recession in the United Kingdom economy. The UK Office for National Statistics (ONS) reported in its revised Q3 Gross Domestic Product (GDP) estimates that the economy contracted by 0.1%. The UK economy is expected to remain on the back foot as higher interest rates have deepened the cost-of-living crisis, forcing businesses to operate with lower capacity.
Daily digest market movers: Pound Sterling drops sharply despite upbeat Sevices PMI data
- The Pound Sterling fell to a near seven-week low of around 1.2600 as the appeal for risk-perceived assets weakened.
- The outlook for risk-sensitive assets has worsened as the upbeat United States employment data forced traders to pare Federal Reserve’s rate-cut bets.
- January’s US labor market data demonstrated a robust demand for workers and that employers offer higher wage growth to retain employees, indicating that businesses have a strong order book.
- As per the CME Group Fedwatch tool, a rate cut in March’s monetary policy meeting is unlikely. For May’s policy meeting, traders see a little above 57% chance for a rate cut by 25 basis points (bps) to 5.00%-5.25%.
- The Pound Sterling has come under severe pressure despite the Bank of England seeming more hawkish on the interest rate outlook than the Fed.
- Investors hope that a subdued economic performance and increasing geopolitical tensions could force BoE policymakers to cut interest rates earlier than expected.
- The United Kingdom’s economy is on the brink of a technical recession. The economy witnessed a GDP contraction of 0.1% in the third quarter of 2023, and a subdued performance is anticipated in the final quarter.
- An absence of economic recovery in the UK would significantly impact the labor market.
- Out of nine member-led Monetary Policy Committee (MPC), BoE policymaker Swati Dhingra voted for a rate cut by 25 bps in last week’s monetary policy meeting. In contrast, policymakers Catherine Mann and Jonathan Haskel supported a rate hike of similar size.
- The UK’s vulnerable economic prospects may force BoE policymakers to join Swati Dhingra and lean towards easing interest rates in upcoming meetings.
- The S&P Global has reported an upbeat Composite and Services PMI for January. The Composite PMI improved to 52.9, against expectations and the former reading of 52.5. Services PMI rose to 54.3 from the consensus and the prior release of 53.8.
Technical Analysis: Pound Sterling dips below 1.2600
Pound Sterling falls further to near the crucial support of 1.2600 as the market sentiment is bearish. The short-term outlook of the GBP/USD is to the downside as the pair has dropped below the 20-day and 50-day Exponential Moving Averages (EMAs), which are around 1.2687 and 1.2642, respectively.
The Cable hovers near the horizontal support of the Descending Triangle chart pattern, which is plotted from December 21’s low point at 1.2612, while the downward-sloping trendline is placed from December 28’s high point at 1.2827.
The 14-period Relative Strength Index (RSI) declines towards 40.00, which could support the current downside momentum.
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.
Read the full article here