Pound Sterling weakens as soft UK data backs BoE rate pause
- Pound Sterling faces a sell-off as UK business activity contracts and labor hiring freezes.
- UK employers shed jobs for the third time in a row as new orders drop.
- Investors see the BoE keeping interest rates unchanged as the UK economy is exposed to a mild recession.
The Pound Sterling (GBP) delivers a breakdown as expectations of a mild recession in the United Kingdom economy have escalated. The GBP/USD pair falls back as higher borrowing costs by the Bank of England (BoE), a poor demand outlook, and deepening geopolitical tensions weigh.
The UK’s labor market appears to be facing the consequences of slowing business activity, with employers shedding jobs for the third time in a row. Going forward, investors will focus on the interest rate decision by the BoE, which will be announced next week. The BoE is expected to keep interest rates unchanged at 5.25% for the second consecutive time, and policymakers are expected to downgrade the growth outlook.
Daily Digest Market Movers: Pound Sterling declines as US Dollar rises further
- Pound Sterling extends downside to near 1.2100 as the UK economy is expected to fall into a mild recession due to declining business activity in a deteriorating demand environment.
- S&P Global reported on Tuesday that the Manufacturing PMI was at 45.2, better than expectations of 45.0 and the former reading of 44.3. However, a figure below the 50.0 threshold signals a contraction in factory activity. UK manufacturing activity has been contracting for more than a year, according to the PMI data.
- This is the longest period of decline in the country’s factory activity since 2008-2009 as firms are cutting on inventory due to a slowdown in new orders.
- UK firms have frozen hiring amid lower levels of new business. S&P Global reported that employers remained worried about the UK economic outlook and constraints on spending due to higher borrowing costs.
- The Services PMI came in at 49.2 in October, below the expected 49.5, and September's release of 49.3. The Services PMI, which gauges activity among service providers, contracted for the third month in a row.
- The effect of the hiring freeze by UK employers is clearly visible in the labor market data reported by the UK Office for National Statistics (ONS) on Tuesday.
- The ONS reported that employment levels fell for the third time in a row. Employers shed 82K jobs in the June-August period, a number that is significantly lower than expectations of 198K lay-offs. In the three months to July period, employment levels were reduced by 207K employees.
- The UK’s Unemployment Rate dropped to 4.2% in the quarter to August against expectations and the former reading of 4.3%.
- Economic data released in October suggest that the UK economy is struggling with high-interest rates from the Bank of England (BoE).
- A slowdown in business activity, labor demand, and weak consumer spending will likely prompt the BoE to keep interest rates unchanged at 5.25% in its monetary policy meeting scheduled for November 2.
- The risk appetite of the market participants remained weak as Israeli troops were preparing to enter Gaza for the ground assault.
- Meanwhile, the US Dollar recovered on Tuesday after finding support near 105.40. Investors rushed for the US Dollar after an upbeat PMI reading for October.
- This week, investors will watch for the Q3 Gross Domestic Product (GDP) data, which will be published on Thursday. Economists anticipate the growth rate doubling to 4.2% against the former reading of 2.1% on an annualized basis.
- A strong growth rate in the July-September could elevate chances of further policy-tightening by the Federal Reserve (Fed) in its monetary policy meeting scheduled for November 1.
Technical Analysis: Pound Sterling exposes to 1.2100
Pound Sterling faced an intense sell-off after a short-lived pullback to near the round-level resistance of 1.2300. The GBP/USD pair failed to sustain above the 20-day Exponential Moving Average (EMA), which indicates that the short-term trend is bearish. The broader Cable outlook is extremely bearish as the 50-day and 200-day EMAs are downward-sloping. Further downside in the GBP/USD pair could drag it towards the psychological support of 1.2000.
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.
