Pound Sterling weakens against US Dollar as Fed rate cut hopes wane

The Pound Sterling remains on backfoot amid dismal market sentiment.
UK monthly GDP data for February will provide cues about the current state of the economy.
Megan Greene doubts speculation for the BoE reducing rates before the Fed.

The Pound Sterling (GBP) remains vulnerable against the US Dollar in Thursday’s early American session after an intense sell-off that dragged the Cable to a two-month low near 1.2520. The near-term appeal of the GBP/USD pair has weakened as the US Dollar strengthens after traders dialled back bets supporting rate cuts by the Fed in the June and July policy meetings.

Persistently higher United States Consumer Price Index (CPI) and Nonfarm Payrolls (NFP) data for March suggested that the Fed may not opt for rate cuts in the near term as these could ramp up price pressures. Also, the Federal Open Market Committee (FOMC) Minutes for the March meeting, released on Wednesday, indicated that policymakers remain worried about the inflation readings for the first two months of the year. The US Dollar Index (DXY), which tracks the US Dollar’s value against six major currencies, prints a fresh more than four-month high near 105.30.

A hawkish guidance from Bank of England (BoE) policymaker Megan Greene fails to offer some support to the Pound Sterling. Megan Greene cast doubts over market expectations that the BoE will pivot to rate cuts sooner than the Federal Reserve (Fed). Greene said, “In my view, rate cuts in the UK should still be a way off.” She further said that inflation in the United Kingdom is more persistent than in the United States due to the tight labor market and trade shocks from energy prices. The scenario of Fed begin to reduce interest rates earlier than the BoE bodes well for the Pound Sterling.

Daily digest market movers: Pound Sterling remains weak despite BoE Greene's deliver hawkish guidance

The Pound Sterling trades above the psychological support of 1.2500. The currency broadly remains on the back foot against the US Dollar as market sentiment turns risk-off after investors push back Federal Reserve rate cut expectations. S&P 500 futures have extended their downside in the European session after plunging almost 1% on Wednesday.
Hot United States inflation data for March, combined with robust labor demand, forced traders to pare big bets supporting Fed rate cuts. Meanwhile, investors’ confidence in three rate cuts by the year-end has also waned, and they are now anticipating only two.
The US CPI has risen by more than expected for straight three months, suggesting that the Federal Reserve will opt to continue to hold interest rates steady in the range of 5.25%-5.50%. Price pressures remained stubbornly higher in March due to a significant rise in gasoline prices, rentals, and insurance costs.
Meanwhile, the US Producer Price Index (PPI) data for March remains mixed. Annual headline PPI increased by 2.1%, missed estimates of 2.2%, but remained higher than the prior reading of 1.6%. The core PPI that strips off volatile food and energy prices, rose sharply by 2.4% from the consensus of 2.3% and the former reading of 2.0%.
On the United Kingdom front, the monthly Gross Domestic Product (GDP) and factory data for February, which will be published on Friday, will guide the next move in the Pound Sterling. The monthly GDP data, which represents the state of the economy, are forecasted to have grown at a slower pace of 0.1% after expanding by 0.2% in January.
Economists have forecasted that monthly Industrial Production data will remain stagnant after contracting by 0.2% in January. On year, Industrial Production is estimated to have increased 0.6% from the prior reading of 0.5%. Monthly Manufacturing Production is expected to have increased by a meagre 0.1% after remaining stagnant in January. On an annual basis, the economic data is anticipated to rise at a higher pace of 2.1% against the former reading of 2.0%.
The UK factory data is a leading indicator of overall demand from domestic and overseas markets. Upbeat factory data would boost hopes that the UK economy will recover from the technical recession.

Technical Analysis: Pound Sterling declines toward 1.2500

The Pound Sterling declines towards the psychological support of 1.2500 on risk-aversion mood. The GBP/USD pair dips to the 200-day Exponential Moving Average (EMA) at 1.2570, which remained a major support before the release of the hot US CPI data. The Cable could witness a sharp downside if it decisively breaks below the 1.2500 support.

The 14-period Relative Strength Index (RSI) hovers near 40.00. If it drops below this level, bearish momentum will trigger.

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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