Pound Sterling rises in holiday-shortened week, BoE policy in focus
- The Pound Sterling trades close to 1.2570 against the US Dollar as investors shift focus to the BoE policy decision.
- The BoE could provide meaningful cues on the timing of rate cuts amid easing price pressures.
- Slower US job growth and a contraction in the Services PMI have raised concerns over the economic outlook.
The Pound Sterling (GBP) moves higher to 1.2570 against the US Dollar (USD) in Monday’s early American session but is still inside Friday’s trading range. The GBP/USD pair is expected to remain less volatile and will be guided by the market sentiment as the United Kingdom markets are closed on account of Early May.
The GBP/USD strengthens as the US Dollar weakens in the aftermath of United States Nonfarm Payrolls (NFP) and the ISM Services Purchasing Managers Index (PMI) data for April. The US Dollar Index (DXY), which tracks the US Dollar’s value against six major currencies, trades sideways above 105.00.
The overall data indicated that the US economy is losing strength: fewer jobs were added, the Unemployment Rate rose to 3.9%, wage growth slowed, and the ISM Services PMI fell below the 50.0 threshold – the level that separates expansion from contraction – to the lowest reading since December 2022.
Despite the downbeat overall picture presented by Friday’s data, investors didn’t bring forward Federal Reserve (Fed) rate cut bets from September as the ISM Prices Paid subindex for the service sector rose significantly to 59.4 from 53.4 in March. High Prices Paid for service sector inputs renewed fears of inflation remaining higher, which is expected to allow the Fed to emphasize maintaining interest rates restrictive for a longer period. Respondents to the ISM survey said: “Inflation is raising our unit cost on products and services when compared to last year’s expenditures.”
Daily digest market movers: Pound Sterling posts gains as US Dollar drops
- The Pound Sterling moves higher above 1.2550 ahead of Bank of England’s (BoE) interest rate decision, which will be announced on Thursday. The BoE is widely anticipated to hold interest rates steady at 5.25% for the sixth time in a row. Therefore, investors will keenly focus on the BoE’s guidance on interest rates.
- The recent commentary from BoE Governor Andrew Bailey indicated that he is confident that headline inflation will return to the desired rate of 2% in April. This suggests that the central bank could deliver a slightly dovish commentary on the interest rate outlook and provide a concrete timeframe for starting to reduce interest rates.
- Reuters shows that financial markets anticipate the BoE reducing interest rates from the September meeting. Traders have also priced in one more rate cut by year-end. The speculation for only two rate cuts is significantly lower than the six anticipated at the start of the year. Andrew Baily also commented in the last press conference after the bank’s policy decision that market expectations for two or three rate cuts this year are not unreasonable.
- However, a few BoE policymakers are still worried about stubborn wage growth feeding service inflation. UK Average Earnings excluding bonus are at 6.0%, almost double what the BoE views as required to be consistent for bringing inflation down sustainably to the desired rate of 2%.
- Investors will also focus on how many BoE policymakers will join Swati Dhingra and vote to pivot to interest rate cuts. It is expected that BoE Deputy Governor Dave Ramsden could change its stance from neutral to dovish on interest rates. Investors’ confidence in Ramsden turning dovish escalated after he commented last month that risks of inflation remaining higher have receded. He also pointed out that inflation will not rebound again after returning to 2%, contrary to prior expectations that price pressure could revamp again.
Technical Analysis: Pound Sterling moves above 1.2550
The Pound Sterling trades inside Friday’s trading range during Monday’s European session. The GBP/USD pair formed a Shooting Star candlestick pattern on a daily timeframe on Friday as it reversed its initial gains after the US Services PMI Prices Paid rose significantly. The above-mentioned candlestick is a bearish reversal pattern and its formation near the crucial resistance of 1.2500-1.2600 adds to its strength.
A breakdown of the Shooting Star pattern would trigger if the pair breaks below Friday’s low of 1.2522. The near-term outlook of the Cable is still positive as it is trading above the 20-day Exponential Moving Average (EMA), which trades around 1.2520.
The 14-period Relative Strength Index (RSI) oscillates in the 40.00-60.00 range, suggesting indecisiveness among market participants.
Risk sentiment FAQs
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.