Pound Sterling surrenders entire intraday gains as market mood turns sour
- Pound Sterling surrenders gains as market sentiment dampens after US data.
- Deepening UK recession fears could imapct the Pound Sterling ahead.
- UK's Services PMI at 53.4 outperformed expectations of 52.7.
The Pound Sterling (GBP) faces selling pressure as market sentiment has dampened after the release of the upbeat United States private Employment data for December. The US Automatic Data Processing (ADP) reported that private payrolls rose by 164K against the consensus of 115K and the prior reading of 103K. Resilient labour demand in the US economy could allow Federal Reserve (Fed) policymakers to endore higher interest rates for a longer period.
Pressue on the Pound Sterling could elevate if fears of United Kingdom entering a mild recession escalate. The outlook of the economy is gloomy amid tough conditions over credit and household demand, which could force BoE policymakers to unwind their restrictive monetary policy stance earlier than anticipated.
The broader outlook for the GBP/USD pair is still upbeat as discussions about rate cuts from the Fed look firm while the Bank of England (BoE) is still emphasizing the need to keep interest rates higher for a longer period.
Meanwhile, upbeat S&P Global UK Composite and Services PMI have added strength to the Pound Sterling's recovery. The Composite and Services PMI at 52.1 and 53.4 outperformed expectations of 51.7 and 52.7 respectively.
Daily Digest Market Movers: Pound Sterling falls after upbeat US ADP Employment data
- Pound Sterling fails to hold recovery as upbeat US labor market data has dampened the overall market mood.
- Imrpoving labor market conditions could keep the context of 'higher interest rates for longer' alive.
- Earlier, investors' risk-appetiet of the market participants was improved after the Federal Reserve’s FOMC minutes, released on Wednesday, indicated that policymakers were cautious about an “overly restrictive” monetary policy stance.
- The Fed minutes indicated that interest rate cuts are on the cards, but the timing is uncertain.
- Fed policymakers were confident about taming inflation without triggering a recession.
- Meanwhile, dismal market mood has joined UK's domestic uncertainties and are weighing on the Pound Sterling.
- The S&P Global, reported this week, UK's Manufacturing PMI dropped to 46.2 against the preliminary reading of 46.4, signaling the effects from high inflation and interest rates in the domestic and overseas markets.
- Business optimism in the UK economy dropped due to soft orders amid a deepening cost of living crisis. Business investment also remains poor as borrowing costs are high.
- The UK economy is exposed to a technical recession after the country’s Gross Domestic Product (GDP) contracted by 0.1% in the third quarter of 2023. The likelihood of another fall in the fourth quarter is significant. In its latest projections, the Bank of England said that it is not expecting any growth ahead.
- The BoE is facing a balancing act between saving the economy from shifting into a recession or cooling down still-high inflationary pressures.
- Underlying inflation in the UK is more than double the required rate of 2%, forcing policymakers to stick with the restrictive monetary policy stance.
- Meanwhile, the US Dollar Index (DXY) recovers to near 102.50 as investors rush for safe-haven assets as the market mood is turning risk-averse.
Technical Analysis: Pound Sterling fails to sustain above 1.2700
The Pound Sterling falls after failing to achive sustainability above the round-level support of 1.2700. Earlier, the asset rebounded swiftly after finding buying interest near the round-level support of 1.2600. The Cable bounces back after correcting to near the 20-day Exponential Moving Average (EMA) around 1.2660.
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.
Author
Sagar Dua
FXStreet
Sagar Dua is associated with the financial markets from his college days. Along with pursuing post-graduation in Commerce in 2014, he started his markets training with chart analysis.
