Pound Sterling walks on thin rope ahead of Powell's speech, UK Q3 GDP

Pound Sterling struggles for a direction as investors shift focus to the Q3 GDP data.
A poor GDP report would elevate dovish expectations from various BoE policymakers.
Rising energy prices have squeezed the UK’s consumer spending.

The Pound Sterling (GBP) is stuck in a tight range as investors seem unwilling to build fresh positions ahead of the release of the UK Q3 Gross Domestic Product (GDP) data, published on Friday at 07:00 GMT. The GBP/USD pair remains on tenterhooks as the Q3 GDP report will shape December’s monetary policy outlook of the Bank of England (BoE).

A decline in consumer spending, poor Services PMI, postponed demand for housing, and contracting hiring have set a negative undertone for the UK’s economic performance in the July-September period. A poor GDP report would elevate dovish expectations from various BoE policymakers, especially from Swati Dhingra, who favors cutting rates if the growth rate remains below expectations. GDP data will be followed by employment and inflation data, which will be released next week.

Meanwhile, BoE Chief Economist Huw Pill said that interest rates are needed to remain restrictive to ease inflationary pressures. More interest rate hikes are not needed to bear down inflation. He further added that slowing growth won't have material impact on inflation and business' purchasing power.

Daily Digest Market Movers: Pound Sterling falls amid risk-off mood

Pound Sterling consolidates in a narrow range below the crucial 1.2300 resistance level as investors await UK factory data for September and Q3 GDP data, which will inform December’s monetary policy decision by the Bank of England.
The data is expected to show Manufacturing Production rose by 0.3% in the month of September versus the 0.8% decline in August. YoY the data is expected to show a 3.1% rise against the 2.8% recorded previously.
Industrial Production is forecast to show a rise of 0.1% against a 0.7% decline in the previous period. The same data is forecast to show a 1.1% increase YoY compared to 1.3% previously.
An uptick in factory data would ease fears of a slowdown in the UK economy.
The show-stopper event that would guide further action in the Pound Sterling is the preliminary Q3 GDP data, which will be released at the same time as the factory data at 07:00 GMT.
Economists have forecasted a nominal contraction of 0.1% against a 0.2% growth rate in the prior April-June quarter. UK firms underutilized their production capacities to avoid piling up unsold inventories amid a poor demand environment.
The data from the Office for National Statistics (ONS) showed that consumer spending contracted in two out of three months in the third quarter as higher energy costs squeezed the real income of households.
The UK economy is heavily reliant on the service industry: the Services PMI contracted in all months of the last quarter.
BoE policymaker Swati Dhingra, who supported keeping interest rates unchanged last week, could emphasize cutting rates sooner if the Q3 GDP report turns out excessively weak.
Earlier, this week, BoE Chief Economist Huw Pill warned about the potential risks of an excessive slowdown as the central bank is committed to keeping monetary policy sufficiently restrictive for a longer period till the achievement of price stability.
Huw Pill said rate cuts in mid-2024 “don’t seem totally unreasonable” and a weak GDP report would prompt dovish expectations from the BoE.
The US Dollar drops to near 105.50 after failing to recapture the crucial resistance at 106.00. Investors await Federal Reserve (Fed) Chair Jerome Powell’s guidance on interest rates.
This week, a balanced tone from Fed policymakers on the interest rate outlook has kept the US Dollar Index (DXY) broadly sideways in a range of 105.40-105.90.

Technical Analysis: Pound Sterling upside remains restricted near 1.2300

Pound Sterling trades lackluster near 1.2300 after correcting gradually in the past three trading sessions. The chances of a recovery in the Pound Sterling are decent.

The GBP/USD pair delivered a breakout of a symmetrical triangle chart pattern last week and the process of testing the breakout with gradual selling seems over. The Cable has stabilized above the 20-day Exponential Moving Average (EMA) but the 200-day EMA is still acting as a barricade.

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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