Pound Sterling struggles to extend recovery UK/US inflation data
|- Pound Sterling finds interim support as UK economic growth was flat in Q3 against expectations of a decline.
- Investors await the UK employment and inflation data for further guidance.
- UK firms cut heavily on investments in Q3 due to a poor demand outlook.
The Pound Sterling (GBP) discovers some optimism as the UK economy manages to avoid a decline in economic activities in the third quarter. The GBP/USD attempts a recovery on temporary optimism but projections for the growth outlook are downbeat as fresh investments from firms in capacity expansion in the last quarter were significantly down due to poor demand from the domestic and overseas markets.
Bank of England (BoE) policymakers: Huw Pill and Katherine Mann are worried about the knock-on effects of higher interest rates in the battle against sticky inflation and are expected to endorse earlier rate cuts, due to deepening recession fears. Forward action in the Pound Sterling will be directed by UK labor market data, which will be published on Tuesday at 07:00 GMT. Investors would keep hiring and wage growth indicators on their radar.
Daily Digest Market Movers: Pound Sterling remains sideways ahead of crucial US/UK data
- Pound Sterling remains cushioned above 1.2200 ahead of the UK Employment and inflation data, which will be published on Tuesday and Wednesday, respectively.
- The GBP/USD pair discovers intermediate support near 1.2200 as the UK economy manages to avert a decline in the third quarter of 2023, remaining stagnant instead.
- Preliminary Total Business Investment in Q3 has contracted strongly by 4.2% against expectations of a 3.5% decline. In the Q2 quarter, the long-term spending by firms rose by 4.1%.
- This has set a negative undertone for the Q4 Gross Domestic Product (GDP) as lower business investment indicates weak confidence of firms in the overall demand by domestic and external players.
- The outlook for the UK economy is downbeat as the cost-of-living crisis has deepened due to higher borrowing costs by the Bank of England, easing labor market conditions, and persistent price pressures.
- UK factory data released on Friday indicated that monthly Industrial Production remained stagnant in September and Manufacturing Production expanded at a slower pace of 0.1% against expectations of 0.3%.
- In the latest forecasts, the BoE projected that the economy will be stagnant in the next two years and a mere 0.1% growth will be seen in 2026.
- Last week, BoE Chief Economist Huw Pill warned that higher interest rates for a sufficiently longer period to tame inflationary pressures could result in an excessive slowdown in the economy.
- The deepening pressures of higher interest rates could force the BoE to consider cutting rates earlier than expected. While discussing cutting rates, Pill said that he expects rate cuts in mid-2024.
- Higher borrowing costs have dampened the affordability of investing in the housing sector. UK property website Rightmove said that asking prices for homes have fallen at their fastest pace in five years for the time of year, reported Reuters.
- Further action in the Pound Sterling would be guided by the labor data, which is scheduled for Tuesday.
- As per the consensus, the Unemployment Rate in the three months ending September is seen unchanged at 4.2%. The Claimant Count Change for October rose by 15K, lower than 20.4K reading from September.
- Apart from employment numbers, investors will keenly focus on the wage data for the July-September period, which has been a major reason behind stubborn inflation in the UK economy. According to the estimates, Average earnings excluding bonuses eased to 7.7% from 7.8% earlier. The wage data including bonuses softened sharply to 7.4% vs. the former reading of 8.1%.
- Meanwhile, the geopolitical tensions remain escalated as Israeli Prime Minister Benjamin Netanyahu has rejected ceasefire proposals unless it includes the release of all hostages captured by Hamas.
- The US Dollar Index (DXY) continues to face pressure near 106.00 despite Federal Reserve (Fed) Chair Jerome Powell saying he doesn’t consider current interest rates adequate to tame price pressures.
- Investors await the US inflation data for October, which will be published on Tuesday. The US price index data will provide cues for further monetary policy action by the Fed.
Technical Analysis: Pound Sterling remains cushioned near 1.2200
Pound Sterling remains cushioned near the round-level support of 1.2200. The likelihood of a bullish reversal from the GBP/USD pair is high as the gradual correction after a breakout from the symmetrical triangle formed on a daily timeframe seems concluded. The 20-day Exponential Moving Average (EMA), which trades around 1.2230 is offering support to the Pound Sterling bulls. The broader appeal for the Cable is still bearish as the 50 and 200-day EMA are sloping south.
Risk sentiment FAQs
What do the terms"risk-on" and "risk-off" mean when referring to sentiment in financial markets?
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.
What are the key assets to track to understand risk sentiment dynamics?
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.
Which currencies strengthen when sentiment is "risk-on"?
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.
Which currencies strengthen when sentiment is "risk-off"?
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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