The Pound Sterling (GBP) fails to hold gains above the crucial resistance of 1.2500 in Thursday’s early New York session amid uncertainty as investors pivot to the US Nonfarm Payrolls (NFP) data and ISM Services PMI report for April, which will be published on Friday.
Economists have forecasted that US employers hired 243K job-seekers in April, lower than the prior reading of 303K. The Services PMI is estimated to have increased to 52.0 from the prior reading of 51.4. The appeal for risk-perceived currencies is taking a hit as the labor market data will significantly influence market expectations for Fed rate cuts, which are currently anticipated from the September meeting.
On Wednesday, the indication from the Fed that it remains tilted towards unwinding quantitative tightening weighed heavily on the US Dollar and bond yields. Fed Chair Jerome Powell delivered less hawkish than feared guidance on interest rates, citing that more rate hikes are “unlikely” despite no progress in the disinflation process in the first quarter this year.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, consolidates near 105.50 in the early New York session. The US Dollar remains steady despite weak Q1 Unit Labor Cost data and steady Initial Jobless Claims figure. Unit Labor Costs grew at a significantly slower pace of 0.3% from the consensus of 3.2%. Meanwhile, weekly Jobless Claims for the week-ending April 26 were steady at 208K, lower than the estimates of 212K.
The Pound Sterling fails to hold an auction above 1.2500. The GBP/USD pair continues to face pressure near the neckline of the Head and Shoulder pattern. On April 12, the Cable experienced an intense sell-off after breaking below the neckline of the H&S pattern plotted from December 8 low around 1.2500.
The long-term outlook of the Cable is uncertain as it struggles to sustain above the 200-day Exponential Moving Average (EMA), which trades around 1.2530.
The 14-period Relative Strength Index (RSI) oscillates within the 40.00 to 60.00 range, suggesting indecisiveness among market participants.
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.
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.
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.
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.