Pound Sterling delivers V-shape recovery on weak US data, Fed-BoE policy in focus

Pound Sterling trades directionless ahead of the monetary policy decision by both the Fed and the BoE.
The BoE is expected to keep interest rates steady as slowdown fears mount.
Stubborn UK inflation puts at risk Prime Minister Rishi Sunak’s pledge to halve inflation to 5.4% by year-end.

The Pound Sterling (GBP) delivers a vertical recovery as the weak US economic data has improved the risk appetite of the market participants. Investors still await a major action ahead of monetary policy decisions from both the US Federal Reserve (Fed) and the Bank of England (BoE). The GBP/USD pair remains on tenterhooks as investors expect that the BoE will keep interest rates unchanged.

The broader demand for the Pound Sterling looks vulnerable as investors seem to believe that the BoE will hold rates steady, prompted by fears of a slowdown in the UK economy, shrugging off still stubborn price pressures. Apart from the monetary policy decision, investors will look for guidance on interest rates going forward and the inflation outlook. UK Prime Minister Rishi Sunak vowed in January to halve inflation to 5.4% by year-end, a promise that looks challenging as annual price growth was at 6.7% in September, broadly unchanged since July.

Daily Digest Market Movers: Pound Sterling capitalizes on poor US economic data

Pound Sterling revived quickly as the appeal for risk-perceived assets improved after the release of the weaker-than-anticipated US private payrolls and factory data.
The US Dollar Index (DXY) fell sharply from 107.00 after weak US private payrolls and the ISM Manufacturing PMI for October. The US ADP reported that private payrolls were lower at 113K than expectations of 150K but higher than September's reading of 89K.
The ISM reported that the Manufacturing PMI was significantly lower at 46.7 vs. expectations and the former release of 49.0. New Manufacturing orders fell significantly to 45.5 against the former reading of 49.2.
On the contrary, The survey of private factories done by S&P Global for October showed that the Manufacturing PMI came in at the 50.0 threshold, which separates expansion from contraction in factory activity.
The broader market mood is still cautious due to geopolitical tensions. Hamas announced that it will release hostages in the next few days, but a ceasefire is not expected as the Israeli Defense Forces (IDF) are looking to enter Gaza for a full-scale ground offensive.
Apart from geopolitical tensions, caution among market participants ahead of the BoE meeting is keeping the Pound Sterling on tenterhooks.
The BoE is expected to keep interest rates unchanged at 5.25% on Thursday. This would be the second straight time in which policymakers leave interest rates unchanged after 14 consecutive rate hikes.
Investors doubt whether UK Prime Minister Rishi Sunak will fulfill his promise of halving inflation to 5.4% by year-end.
Consumer inflation in the UK economy is the highest among G7 economies due to robust wage growth. In spite of persistent inflation risks, the BoE is expected to maintain the status quo as the economy is slowing down due to deteriorating labor demand.
The UK Office for National Statistics (ONS) reported that employment shrank for the third time in a row in August, warranting upside risks to the Unemployment Rate.
Other economic data pointing to weak consumer spending and declining business investment are also supporting a steady interest rate decision from the BoE.
While robust wage growth continues to prompt price pressures, food price inflation dropped significantly in October. High inflation and soft labor demand forced households to spend less and save more amid a volatile environment.
The British Retail Consortium (BRC) reported on Tuesday that food inflation declined for a sixth straight month. The food price index decelerated to 8.8% in October from 9.9% in September.
Meanwhile, investors await the Fed’s monetary policy decision. The Fed is expected to keep interest rates in the range of 5.25%-5.50% but will deliver hawkish guidance as inflation in excess of 2% seems the most stubborn due to robust consumer spending, strong labor market conditions, and expectations of a revival in business activity.

Technical Analysis: Pound Sterling rebounds from 1.2100

Pound Sterling recovers sharply from 1.2100 ahead of monetary policy decisions from both the Fed and the BoE. The near-term outlook remains bearish as the 20-day Exponential Moving Average (EMA) has been acting as a major barricade for the Pound Sterling bulls. Downward-sloping 50-day and 200-day EMAs indicate that the broader trend is extremely bearish. Momentum oscillators demonstrate a contraction in volatility.

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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